US credit investors brace for economic slowdown

Rising recessionary concerns are seeing some investors reduce risk in their credit exposure as they brace for an economic slowdown whose magnitude remains highly uncertain.

Benchmark 10-year Treasury yields — a barometer for mortgage rates and other financial instruments — have gone down to 2.99% from around 3.5% on June 14. But the yield spread on the ICE BofA US High Yield Index, a commonly used benchmark for the junk bond market, has gone up by over 50 basis points over the same period and its investment grade equivalent has also increased. Credit spreads typically widen when risk of default rises.

For Jonathan Duensing, head of fixed income, US portfolio manager at Amundi US asset management, credit spreads point to an economic slowdown, although not a severe one, but they could widen further. Still, it could be prolonged by the Fed’s lack of ability to help as the central bank is constrained by inflation, he said.

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