What to Watch When Credit Spreads Narrow

Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley, discusses the unusually low credit spreads in the US and European corporate bond markets. He explains that these spreads, representing the difference in yield between corporate and government bonds, are at their lowest levels in over two decades. While historically low spreads have persisted in the past, Sheets notes that the current low levels present a challenge for investors seeking adequate risk premiums. He identifies two potential catalysts for a change: weaker economic growth, which would likely increase the risk premium demanded for corporate debt, and a shift in the relative fiscal trajectories of governments and corporations, potentially leading to increased corporate borrowing.