False Alarm: The Case for Corporate Credit

Goldman Sachs

Research

8 Pages

Goldman Sachs Asset Management argues recent corporate credit spread widening is more noise than signal, suggesting markets may be overpricing recession risk. The piece highlights a 210 bps high yield spread move while maintaining defaults near 2%, framing current dislocation as opportunity rather than warning.

Key Takeaways

False Alarm Signals: Credit spreads widened sharply in 2018, including 47 bps in investment grade, yet similar moves in 2015 did not precede recession, questioning reliability of spreads alone.
Attractive Valuation Reset: High yield spreads moved from the 13th percentile in 2017 to the 59th percentile in 2018, indicating a meaningful repricing toward historically fair value levels.
Contained Default Risk: Expected high yield default rates remain around 1.75% to 2%, versus market-implied levels near 4.8%, suggesting potential mispricing of downside risk.
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