US corporate credit spreads were not adequately priced for Federal Reserve Chair Jerome Powell’s hawkish comments at Jackson Hole, and are significantly underpricing the risk of a recession, according to UBS Group AG strategists.
Current credit spread levels imply a 25% chance of a recession, compared to UBS’s forecast of a 55% chance, strategists led by Matthew Mish wrote Tuesday.
UBS expects US corporate credit spreads to retest this year’s wide levels “on further Fed hikes and slowing growth.”
The spread on Bloomberg’s benchmark investment-grade index sits at 138 basis points as of Monday, compared to a July 5 wide of 160. The high-yield index is at 461 basis points versus 583 on July 5.
“Remain cautious on credit,” Mish wrote. “With labor markets too strong and inflation too high, tightening needs to persist with risks to growth and vol now greater to the downside and upside, respectively, implying a widening bias for spreads.”
Read more: Morgan Stanley Warns of a New Credit Canary in the Coal Mine
The bank is bearish on leveraged loans, in particular, and second quarter earnings results solidified that view, Mish wrote, adding that the resilience in credit metrics for higher rated leveraged loan issuers is masking weakness in the rest of the market.
This article was provided by Bloomberg News.