- Spreads in investment grade and high yield remain near year-to-date wides.
- Weak commodities prices are pushing some high-yield credits toward default.
- The first Fed tightening cycle in almost a decade is upon us.
- Downgrades far outpaced upgrades in the quarter, and the outlook is for more of the same.
- Steady but low GDP and a strong consumer provide support to credit.
We expect volatility to remain elevated in the first quarter, with spreads staying range-bound at or near year-to-date wides. We expect the ongoing headwinds of weak commodity prices and debt-funded mergers and acquisitions to continue. Pressure on the energy and metals and mining sectors, which got hit hard in the fourth quarter, does not look likely to abate, per our sector analysts. Still, we expect mild economic growth to continue domestically, which, along with spreads at above-average levels, should provide support to valuations.