Global Markets Daily: Credit: When Higher Yields Become Less Supportive

Credit spreads have historically provided some cushion when government yields rise, particularly when higher rates reflect stronger growth expectations. That cushion has become less reliable in recent months; since July, USD and EUR credit spreads have moved higher in tandem with government yields, creating a dual headwind for unhedged credit returns. This Global Markets Daily revisits the relationship between rates and credit spreads, focusing on why the correlation has shifted into more positive territory and what that means for credit investors. The spread/rates correlation is especially important for IG credit, where elevated all-in yields have been an important technical support for demand in recent years, but that support is less reliable when the increase in risk-free rates is accompanied by wider spreads and elevated rates volatility. We think the recent spread moves reflect a combination of higher oil prices, a rapid rise in government yields, and renewed fiscal concerns in Eu