In a bid to combat inflation, central banks have predominantly relied on rate hikes to increase borrowing costs, reduce investment and spending, and thus temper growth and, subsequently, inflation.
Yet, so far, growth has remained robust and inflation elevated. A significant factor in the lagging transmission has been the extensive refinancing activities during the previous ultra-low yield environment, enabling businesses and households to borrow cheaply at extended maturities while simultaneously boosting their cash reserves. As a result, the need to borrow at the current high costs has been low. With little reason to borrow, new issuance, particularly in the high yield sector, has decreased markedly, with the average maturity hitting a record low. However, as more maturities loom (“maturity wall”), more issuers might have to refinance at the current very elevated all-in yields. Given the Fed's restrictive policy stance, marked rate reductions might only materialise after pronounced credit spread increases, which, notably, have not occurred so far. We continue to hold a net short position in credit risk, especially after the recent rate surges that could render financing unfeasible for many weaker issuers. In terms of duration, we are leaning towards a long position. While further short-term yield spikes cannot be ruled out, we believe that any emerging credit events could trigger a decline in interest rates.