UBS analysts see a "softer landing" for credit markets in the second half of 2024, citing recent economic data and a potential "immaculate disinflation" scenario. This translates to rangebound credit spreads in the near term, with modest widening by year-end due to expected slower growth.
"Our baseline view calls for rangebound credit spreads from current levels," says UBS, "with solid fundamentals and technicals offsetting a slightly tight valuation backdrop." They forecast IG spreads to reach 95 basis points (bps) by year-end, up from 88 bps currently.
The key upside for the market, according to UBS, is disinflation without a significant slowdown in economic growth. However, they acknowledge downside risks from a renewed rate hike cycle or a sharper economic downturn.
UBS emphasizes the resilience of credit fundamentals, pointing to factors like solid corporate earnings growth and low debt levels. While acknowledging signs of slowing consumer spending, they downplay the risk of a material downturn.
"Credit fundamentals look quite healthy," says UBS. "Our credit-based recession gauge is stable at 28%, supported by solid corporate earnings growth."
The report also highlights attractive valuations, noting that current yields on investment-grade and high-yield debt are appealing from a historical perspective. They believe credit demand will remain resilient, with a potential easing in issuance for the rest of the year.
Overall, UBS paints a cautiously optimistic picture for the credit market in the coming months, expecting a soft landing with some potential for widening spreads as the year progresses.