Goldman Offers Glimmer of Optimism on Credit as Market Zigzags

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Thursday was a down day for credit in Asia. Yield premiums on Asian dollar bonds and the cost of insuring debt against default in the region both increased, as more dour news on the coronavirus pandemic limited risk-taking. Read more about that here.

Still, for investment-grade credit, the peak of the rout was probably in March, as unprecedented steps by the Federal Reserve to pump liquidity into the financial system have been helping since then, Lotfi Karoui, strategist at Goldman Sachs, wrote in a report. Spreads on such debt though will likely remain in recession territory for another two quarters, and the outlook for the high-yield market looks grim, he said.

“The potency of the policy support greatly limits the scope for spreads to revisit the March wides,” Karoui wrote. “By contrast, the numerous fundamental headwinds facing the HY market will likely push spreads wider from current levels.”

Emerging-market debt is also being targeted by sellers, traders say. Those economies are suffering disproportionately from the collapse of commodity prices, supply chains, trade and spending, and monetary and fiscal stimulus measures could worsen the massive exodus by foreign investors.

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©2020 Bloomberg L.P.

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