Corporate credit has absorbed recent shocks with limited disruption. Head of High Yield Tom Ross and Corporate Credit Portfolio Manager James Briggs examine how fundamentals, market behaviour and dynamics as well as macro context are shaping credit resilience.
Credit markets sanguine amid geopolitical risk
The conflict in the Middle East has drawn parallels with the outbreak of the Russia-Ukraine War, with concerns that an oil-induced supply and inflation shock could harm the global economy. So far, credit markets have reacted in a sanguine manner, with changes in credit spreads not dissimilar to the rates impact from rising government bond yields.
As the chart below shows, the recent tick-up in credit spreads is muted when compared to last year’s Liberation Day sell-off, let alone the 2015 energy sell-off after oil prices collapsed or the Covid spike.
For now, the market assumption is that the conflict remains regional, although high oil and gas prices – caused by Iran’s choke hold on ships transiting the Strait of Hormuz – could have a material impact on inflation and consumption were they to be sustained beyond the short term. For the time being, geopolitical shocks have not yet translated into a material deterioration in key economic data. So far, we see this as a volatility event rather than an economic event impacting inflation and consumption.
