Credit conditions drive the economic and market cycle. When credit is available at a reasonable cost, hiring happens, investment happens, M&A activity happens, and if such is done thoughtfully and prudently, earnings grow accordingly. Credit conditions drives it all – it’s the oxygen and fuel that drives the financial system. Credit conditions deteriorate when the Fed hikes short rates and inverts the shape of the yield curve (short dated rates > long dated rates). When short rates > long rates, it’s impossible to create credit, either good or bad. When you can’t even create “good credit,” you’ve got yourself a problem. History says the contraction of credit conditions is the single biggest driver and predictor of recessions and default cycles.
A review of current credit conditions looks like business as usual. Yields for all forms of corporate credit are low, from AAA rated down to the high yield/junk bond market. Credit spreads (the risk premium of credit above the risk-free rate) is also very low and very stable. With 7m people still unemployed here in the US, the economic cycle looks very much like “early innings”. The credit markets actually look probably more “mid cycle” but definitively NOT “late cycle”. The EKG of the credit markets is “normal”.
In a world that needs to grow, it’s nice to have bond yields so low and credit spreads moving slow.