According to a Bloomberg survey, analysts assess the likelihood of a recession within the next year in both the US and the eurozone as relatively low (around 30%).
Credit metrics of high-yield (HY)-rated companies such as interest coverage or debt leverage are still
strong. Moreover, defaults in the US and Europe have declined since their peak some months ago. As a result, credit spreads are mostly low in historical comparison.
We can make the following observations. Firstly, around 70% of all credit segments are trading at historically low spread levels (percentiles <50%) and are thus highly valued. Secondly, in relative terms, CCCs and single-A’s are the cheapest pockets based on historical percentiles. Thirdly, EUR spreads look more attractive compared to USD spreads in all credit segments. Fourthly, USD BBs, Bs and Non-Financial BBBs are the most highly valued segments. Given the outlook of a moderating US economy, coupled with non-negligible recession risks, many credit investors seem to prefer the stronger BB credit quality in HY, but also the higher yielding BBB segment in the more stable Investment Grade (IG) segment. For September, we are adopting a neutral view on HY and IG credit spreads and a neutral view regarding US, EU and Swiss bond yields.
