Credit Yields Look Attractive Despite Rising Recession Risks

High-Yield and Bank Loan Outlook

Third Quarter 2022

Here are the key takeaways from our latest High-Yield and Bank Loan Outlook report:

  • Although July saw a solid recovery for risk assets, a looming concern is that aggressive Federal Reserve (Fed) policy will trigger an economic recession in the United States, a risk that rises with data showing stubbornly persistent inflation even as economic activity cools.
  • The probability of a recession in 2023 is rising meaningfully, but there are some indications that the recession may have already arrived.
  • In the lead up to recession, we expect to see corporate earnings outlooks fall, more credit downgrades than upgrades, and default activity rise from its current low.
  • Strong balance sheets that boast a healthy liquidity profile and sticky cash flows to cushion a pullback in economic activity will be in demand.
  • As we navigate downside risks, our approach is to select the best credits within industry silos.
  • High-yield corporate bond yields are nearly 8 percent, and leveraged loan yields are nearly 9 percent. Each has traded at average yields of 6.3-6.4 percent since 2010.

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