Correlations Between Credit and Equities Are Breaking Down
- Moderating inflation data increases possibility of rate cuts
- Signs the economy is weakening are a risk for corporate credit
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Credit markets are breathing a sigh of relief after inflation data showed price pressures are cooling broadly, but a weakening economy poses fresh risks to corporate debt.
A perceived gauge of risk in the high-yield credit market eased to the lowest since March following cooler-than-expected inflation in June. But the optimism may be masking risks that would materialize if the Federal Reserve doesn’t manage to pull off a soft landing and the economy cools too much, potentially pushing credit downgrade and default rates higher.