Credit markets: Fundamental risks ‘the key driver’ in Q4, strategist says

BNP Paribas Head of U.S. Credit Strategy Meghan Robson joins Yahoo Finance Live to discuss the outlook for the credit markets, high yield bonds versus investment grade credit, and the credit cycle.

影片文字轉錄稿

[AUDIO LOGO]

- Well, we have seen bond markets just get slammed this year and Bloomberg has crunched the numbers, they see over $1 trillion in additional costs if governments and corporations refinance some $65 trillion of debt on its main index. All of this as global central banks try to keep a lid on inflation without sending the global economy into recession. Let's bring in Meghan Robson, BNP Paribas Head of US Credit Strategy to discuss.

Meghan, good to talk to you today. Bottom line here, obviously, refinancing getting a lot more expensive for these companies. What are you seeing in terms of credit spreads and how quickly are they widening?

MEGHAN ROBSON: It's great to be here. Thanks for having me. So in credit markets, we have seen the second leg wider in credit spreads, which started in mid-August. Our forecast is for credit spreads to continue to move wider and we think that investors are starting to focus a lot more on fundamental risk, which will be the key driver as we move into the fourth quarter.

- Yeah, I mean, with that said, we sort of provided the backdrop here that we are seeing higher rates or rates moving up more rapidly. When you look at those credit spreads specifically, what do you think that says about how investors are pricing in risk and that potential for a recession down the line?

MEGHAN ROBSON: Yeah, I think that our look at the maturity wall is that it's relatively manageable for 2023 and 2024. You really start to pick up more maturities into 2025. In the near term, interest coverage is actually manageable with higher rates, assuming that EBITA coverage, EBITA growth is constant.

When really becomes a bigger risk is if we see higher interest rates and also slower EBITA growth. In that scenario, you start to see interest coverage come down more materially. And I think that's the risk to watch, the combination of higher rates and also slower EBITA growth.

- So when we think about sector by sector, obviously, tech, one of those that's been hit the hardest given the huge debt load they've had. But also energy, one of the best performers, if you look at the year so far to date, where are you seeing the biggest deterioration in credit?

MEGHAN ROBSON: So I think it's going to be we have a preference for higher quality credit. So to state the obvious, we're calling for decompression. We think that within high yield, the lowest rated companies are going to be most exposed. So CCC, for example.

I think within sectors, some of the more cyclical sectors such as retail, we're underweight there. The retail sector has seen inventories build and they're more exposed to potentially having to discount prices in order to offload those inventories, which could weigh on margins ahead. Meanwhile, you have energy, which has performed very well and that is one reason that we like high yield over leveraged loans, because you have more energy exposure in that market.

- I know you're focused specifically on US credit, but how does the credit market here compare to what we're seeing in Europe, for example?

MEGHAN ROBSON: So the backdrop here is I think a lot more benign. Having said that, there is more risk priced into European credit markets. So we think that the catalyst for a rally in Europe, the bar there is slightly lower than it is for US. Heading into the growth slowdown, though, we do, in our base case, prefer us credit as credit quality is a little bit better, and the risks around energy and heading into the winter are a lot more benign for US markets.

- So let's talk strategy specifically for those who are looking to get into the credit markets. Where should they be putting their money?

MEGHAN ROBSON: So we like investment grade over high yield bonds. So if you look at the investment grade market, we've seen a very material rise in risk free rates. And as a result, the yield you get on an investment grade corporate bonds looks relatively attractive to other asset classes, so compared to a dividend yield in stocks, and even compared to treasuries. So we like investment grade credit here.

Within high yield, we like being up in quality. So a BB high-yield yield now is 7.75%. That's roughly the yield you got during COVID. Even if we see some spread widening from here, we think that offers attractive carry and is starting to get to be an attractive entry point for investors.

- Yeah, quality, the safe bet, obviously, in this environment. Meghan Robson, BNP Paribas Head of US Credit Strategy. Good to have you on today.