Credit Market Outlook

Apollo Chief Economist

Fed Chair Powell said yesterday that the FOMC wants to tighten financial conditions. Investors must monitor to what degree this policy goal is achieved through wider credit spreads, lower equities, and/or higher interest rates.

This chart book looks at recent trends in credit markets, and the conclusion is that yield levels are rising, and IG spreads and HY spreads have widened. But with unemployment at 3.6% and inflation at 8.5%, there is still some way to go before the economy begins to cool down. The bottom line is that the Fed needs to continue to tighten financial conditions because of significantly elevated inflation levels, and some of this tightening will come in the form of wider credit spreads. As a result, the ongoing turbulence in markets is likely to continue until we begin to see inflation trend meaningfully lower.

Chart showing widening spreads between investment grade and high yield bonds
Source: Bloomberg, Apollo Chief Economist. Note: Tickers used are HYG US Equity and LQD US Equity.

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