As we navigate the current economic climate, we wanted to share our thoughts with you. There is a 50% probability that the Federal Reserve will increase rates by 25 basis points at their May 3rd meeting. This is due to a slower-than-anticipated decline in inflation and a robust labor market in the United States.

The Federal Reserve may elect to pause rate hikes in May if there is an unexpected decrease in inflation or if a “credit crunch” in the US banking system disrupts the broader economy. The baseline projection for 5-year and 10-year US Treasury yields is between 3.50% and 4.00% by the end of the year. However, the risks to this projection are tilted to the downside due to an increased likelihood of a recession in the United States.

Year-to-date, most US dollar credit asset classes have performed well. However, market volatility is expected to persist. Spreads for US investment grade and high-yield credits are projected to remain between 120-130 basis points and 400-450 basis points, respectively. Credit spreads widened significantly in February, following the collapse of Silicon Valley Bank and Signature Bank in the United States, as well as the forced acquisition of Credit Suisse by UBS.

In our view, investors may benefit from an overweight position in investment-grade credits relative to high-yield credits due to their favorable risk-reward profile and high carry, with average yields exceeding 5%. However, we are cognizant that credit spreads now comprise a smaller portion of overall carry compared to the past.

High-yield credits offer an average yield of 8.5% as of the first quarter, with credit profiles skewed toward BB-rated issuers. However, it may be premature to adopt a more aggressive stance towards speculative-grade credits as the economic outlook for both the United States and the world remains uncertain in the second half of the year.

As always, we value your trust and partnership and are committed to keeping you informed on developments in the market.

31 Mar 2023