The Weekly Strategy Report (December 10, 2018)
- U.S. credit markets have struggled over the past two months, with spreads widening to levels not seen since 2016.
- Negative market dynamics, both technical and fundamental, have buffeted credit markets. Higher volatility, a drop in the oil price, concerns about global growth and fears of a new surge in fallen angels all contributed to the sell-off.
- Looking ahead, we anticipate credit investors will get some relief from continued resilience in the U.S. growth outlook and a stable, if not higher, oil price. Bouts of volatility and fears over fallen angels, however, are likely here to stay—especially as the BBB market is now 2.5x the size of the entire high yield market.
- We remain neutral on credit and maintain a preference for U.S. high yield over investment grade. Outside the U.S., we acknowledge that spreads for emerging market credit have widened materially, but refrain from leaning into the asset class due to poor fundamentals.
EXHIBIT 1: CCC BONDS UNDERPERFORMED IN NOVEMBER
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