Momentum slows as investors’ concern increases
A New Year rally in U.S. corporate bonds has started to lose some momentum, as some investors become skeptical of recent optimism about a ‘Goldilocks’ economic scenario of slowing inflation against a backdrop of moderate growth.
They said U.S. investment grade bonds rated BBB implied a 30% chance of recession, and CCC rated bonds implied a 35% chance. By comparison, economists polled by Reuters last month put a 60% probability on a recession taking place in 2023. Money markets bet the Fed will start cutting rates towards the end of the year, while Fed officials forecast interest rates to remain higher for longer.
“Even though balance sheets are pretty strong here, we’re going to be heading into a recession or strong slowdown, where the Fed’s response function could be different than previous recessions,” Krieter said. “Credit markets would have to play out on their own without the Fed’s massive, extraordinary accommodative policy, unlike the last two recessions.”
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