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BofA Warns Of Credit Market Dysfunction

US OUTLOOK/OPINION
  • BofA analysts see credit stress as having reached a “borderline critical zone” this week, with distress, dispersion and debt-to-enterprise-value ratios were all above June highs..
  • A Fed hiking slowdown and possible pause would “allow the economy to fully adjust to all the extreme tightening already implemented, but still working its way through the financial system’s plumbing”.
  • Failure to do so risks dysfunction that “would be difficult to contain and fix” with high yield credit spreads potentially hitting 600-650bps if hikes continue at the current pace.
  • That's from the Bloomberg high yield spread currently at 560bps, within 20bps of early July’22 highs.

Bloomberg high yield index (white), 10Y Tsy (yellow) and OAS to Tsy (green)Source: Bloomberg

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  • BofA analysts see credit stress as having reached a “borderline critical zone” this week, with distress, dispersion and debt-to-enterprise-value ratios were all above June highs..
  • A Fed hiking slowdown and possible pause would “allow the economy to fully adjust to all the extreme tightening already implemented, but still working its way through the financial system’s plumbing”.
  • Failure to do so risks dysfunction that “would be difficult to contain and fix” with high yield credit spreads potentially hitting 600-650bps if hikes continue at the current pace.
  • That's from the Bloomberg high yield spread currently at 560bps, within 20bps of early July’22 highs.

Bloomberg high yield index (white), 10Y Tsy (yellow) and OAS to Tsy (green)Source: Bloomberg