Credit market pressures ease as soft landing expectations heave into view

investmentweek.co.uk:

Janus Henderson Investors’ latest Credit Risk Monitor tracks corporate fundamental and macroeconomic indicators on a traffic light system to indicate where we are in the credit cycle.

According to the latest Janus Henderson Investors Credit Risk Monitor, which tracks key indicators affecting credit portfolios, falling inflation and rate cuts expectations are allowing yields to decline and companies to more easily refinance in capital markets. 

This is despite bank lending standards remaining historically tight. However, the asset manager argued earning forecasts suggest companies may be through the «worst phase».

Corporate defaults to rise as access to capital deteriorates following banking turmoil

Against this backdrop, both the ‘Access to Capital Markets' and ‘Cashflow and Earnings' indicators moved from red to amber in the final three months of 2023 for the first time since the third quarter of 2022. 

«Rate cuts are predicated on a fall in inflation. If that persists, it will allow central banks to ease aggressively, which will stand us in good stead,» said Jim Cielinski, global head of fixed income at Janus Henderson Investors.

«We think that spreads will tighten in the coming months. The soft landing, the friendlier central banks stance — all this tends to be supportive of that. We do not expect heroics from the corporate bond segment, but we think they can do better than just the coupon or carry that they provide.»

The ‘Debt Loads and Servicing' indicator remained red, however, due to a mild weakening in credit fundamentals and a uptick of the default rate across both European and US high yield, which is expected to peak at relatively low levels. 

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Distress is