US credit feels the pressure of high commodity exposure

January 5, 2016

Research Team at Deutsche Bank, suggests that US credit markets have made a U-turn midway through 2015, as doubts began to surface with respect to issuer fundamentals, exposure to commodities and EM, and more recently even certain developed market names.

Key Quotes

“The US credit market reflects a much more realistic view of a potential for rising credit losses from here, with spreads in both HY and IG being at 3- to 4- year wides. 

We see three primary risks to the upside from here. The first one, least predictable but most relevant, is the Chinese economy turning the corner. The second, somewhat evident, is equities continuing to diverge in the face of commodity meltdown. The third, perhaps the most obvious, is more stimulus from central banks, at least outside the US. We discuss each of these in greater detail in our full year-ahead publication to be released soon. That they are listed here as risks, and not base case, gives readers a preview as to our assessment of their probabilities.

Overall, we expect the push-and-pull to continue, with those seeking more yield and those seeing signs of a cycle turn. We expect variable degrees of success to be claimed by each side at different points over the course of 2016. We find ourselves believing in moderate increases in ex-energy defaults to 3.2% next year, up from 1.9% today, and a continued pressure on HY spreads, where USD DM ex-energy index could widen by about 100bp.” 

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