ab6 February 2024Global Research and Evidence LabGlobal Strategy6 Key Credit Market Themes for 2024US credit market outlook: higher conviction in carry trades for H1Fundamentally, we see US IG/HY spreads supported in a 90-115/ 300-375bp range in coming months amid more evidence of green shoots in growth and credit data detailed below coupled with declining inflation, assuming limited surprise in Friday's CPI revisions. Technically client positioning is pretty close to average, ETF inflows remain elevated while pent-up demand from total return investors is still flowing into the market, and net issuance remains limited with M&A/LBO supply fairly subdued. Seasonal factors through February-March are neutral-to-slightly negative for spreads. The largest hurdle optically is valuations, but they appear less expensive now given sideways trading and the recent data strength. Historically tight valuations are more of an impediment to 12-month, not 6-month, performance. In US IG we prefer the belly of the curve (3-7yr), triple B corporates, and the utility and telecom sectors. In US HY we favor double and single Bs, tech, and noncyclical sectors - acknowledging these views will pivot on election outcomes. US credit recession probability falls to 24% as lending conditions improveOur credit-based recession model probability eased 6pp to 24%, driven by less tightening in bank lending standards. Recent data uniformly points to improving credit availability: one, net tightening in bank C&I loan standards to small firms fell from 30.4% to 18.6% q/q; loan officers project this to improve further to 1.8% by end-24; two, the improvement is now in-line with our non-bank liquidity indicator which has signalled less tight conditions for several quarters; three, US corporate issuance has been robust YTD (+71% YTD y/y), led by leveraged loans (+331% YTD , Figs 1-4).The 3 vulnerable segments in credit are on net signaling a more positive outlookOur lower rated corporate debt indicators are positive: bank and non-bank markets are suggesting further improvement in lending conditions, US LL ratings migration was net positive in January, and private credit defaults declined again in Q4 (from 3.9% to 3.4%). On commercial real estate: the indicators are more neutral: the SLOOS survey signalled less tight financing conditions ahead, but default rates remain bifurcated across sectors: office and multifamily continued to rise in January m/m (to 6.2 and 2.8%), while retail, lodging and industrial declined (to 5.6, 5.1 and 0.4%). On consumer credit: indicators are also more mixed; our US consumer health gauge looks a bit better (z-score -0.2); bank loan standards are projected to remain little changed in 2024; but delinquencies continue to climb modestly to 1.4%, led by cards (6.4%, Figs 5-7).Credit technicals look stable in the near termUS HY ETF flows, more closely corre...
