Why We Like Credit Over Equities

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Summary

  • We prefer investment grade credit over equities right now. Our reasoning: valuations, strong balance sheets, low supply and moderate refinancing risks.
  • U.S. data last week showed strong job creation but still low labor participation. Stocks lost steam and bond yields spiked as markets priced in more Fed hikes.
  • We expect U.S. CPI and PPI data this week to show that high inflation is persisting. China’s social financing and CPI inflation data are also in focus.

Bonds

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Transcript

Market fears of a global growth slowdown have replaced worries about higher inflation since June.

This has triggered a fall in bond yields, boosting investment grade credit performance in the past two months.

There are three reasons

The chart shows that surge in government bond yields, represented by the red are in the chart, have surged. The yellow area shows a widening of spreads, the risk premium investors pay to hold IG bonds over government peers.

US Treasury Yield And IG Credit Spread, July 2021-July 2022 (BlackRock Investment Institute, with data from Bloomberg, July 2022)

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