Our Chief Fixed Income Strategist Vishy Tirupattur explains why
credit markets have held firm amid macro volatility, and the
scenarios which could hurt its strong foundation.
----- Transcript -----
Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan
Stanley’s Chief Fixed Income Strategist. Today, I will talk about
why credit markets have been resilient even as other markets have
been volatile – and market implications going forward.
It's Tuesday, March 18th, at 11 am in New York.
Market sentiment has shifted quickly from post-election euphoria
and animal spirits to increasingly growing concern about downside
risks to the U.S. economy, driven by ongoing policy uncertainty
and a spate of uninspiring soft data. However, signaling
from different markets has not been uniform.
For example, after reaching an all-time high just a few weeks
ago, the S&P 500 index has given up all of its gains since
the election and then some. Treasury yields have also yo-yoed,
from a 40-basis points selloff to a 60+ basis points rally. Yet
in the middle of this volatility in equities and rates, credit
markets have barely budged. In other words, credit has been a low
beta asset class so far.
This resilience which resonates with our long-standing
constructive view on credit has strong underpinnings. We had
expected that many of the supporting factors from 2024 would
continue – such as solid credit fundamentals, strong investor
demand driven by elevated overall yields rather than the level of
spreads. While we expected the economic
growth in 2025 to slow somewhat, to about 2 per cent, we thought
that would still be a robust level for credit investors. These
expectations have largely played out until recently. While we
maintain our overall positive stance on credit, some of the
factors contributing to its resilience are changing, calling the
persistence of credit’s low beta into question.
While we did anticipate that sequencing and severity of policy
would be key drivers of the economy and markets in 2025, growth
constraining policies, especially tariffs, have come in faster
and broader than what we had penciled in. Incorporating these
policy signals, our U.S. economists have marked down real GDP
growth to 1.5 per cent in 2025 and 1.2 per cent in 2026.
From a credit perspective, we would highlight that our economists
are not calling for a recession. Their growth expectations still
leave us in territory we would deem credit friendly, although
edging towards the bottom of our comfort zone. On the positive
side of the ledger, cooling growth may also temper animal spirits
and continue to constrain corporate debt supply, keeping market
technicals supportive. Also, while treasury yields have rallied,
overall yields are still at levels that sustain demand from
yield-motivated buyers.
That said, if growth concerns intensify from these levels, with
weakness in soft data spreading notably to hard data, the
probability of markets assigning above-average recession
probabilities will increase. This could challenge credit’s low
beta, that has prevailed so far, and the credit beta could
increase on further drawdowns in risk assets.
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