The Narrative in Credit Markets vs. The Narrative in Rates Markets

Apollo Chief Economist

With the spread between IG and HY narrowing over the past six weeks, the market seems to believe that the probability of a recession is declining.

This is inconsistent with the sharp decline in long rates over the same period, suggesting that the Treasury market is getting more worried about a coming slowdown in GDP growth and earnings.

Maybe the reason is that equity and credit markets focus on the past earnings season and the next earnings season, but Treasury markets have a longer horizon. Equity and credit markets are saying that in the near term, everything is fine, but Treasury markets are saying that a recession next year is likely. But both cannot be right at the same time: Either we will have a recession, and credit spreads should be wider. Or we will not have a recession, and rates should be trading higher.

Our latest credit market outlook chart book is available here.

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