September 30, 2022 17:10 GMT
- 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