(Bloomberg) — Just a few months into the year and Wall Street credit analysts are ripping up their forecasts and penciling in a new, grimmer outlook after this week’s jolt to the market.
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Prognosticators from Barclays Plc to Goldman Sachs Group Inc. were caught flatfooted this week and had to revise their estimates as the selloff rippling through the markets drove corporate bond spreads wider and saw a series of borrowers postpone sales.
“Credit spreads are not pricing in enough risk,” Barclays Plc analysts Bradley Rogoff and Dominique Toublan warned as they updated their forecasts Friday after a flurry of tariff updates and mounting recession fears blew out their prior outlook. “The uncertainty about the magnitude and speed of the tariff implementation is a key driver of this change.”
The bank now expects high-grade spreads to widen to as much as 125 basis points in the next six months, some 30 basis points wider than their prior forecast. Investment-grade spreads reached 97 basis points Thursday, the widest since September.
In high-yield, Barclays now expect spreads to reach as wide as 425 basis points in the same time period, about 100 basis points wider than their previous outlook.
Monday’s selloff after President Trump refused to rule out a downturn caught many offguard. The relatively staid corporate debt market, which in February had seen narrower price swings than Treasuries, got swept into the melee. US government bonds held steady on the week while the risk premium to hold corporate debt went to the widest since September.
Banks are warning credit spreads could widen further as investors seek higher premiums to protect against the risk of default. Driving up the borrowing costs for corporates risks further slowing growth in a US economy that some see as edging closer to a downturn.
On Wednesday, Goldman sharply raised their forecasts for US credit spreads, citing tariff risks and the White House’s willingness to tolerate short-term economic weakness. The bank had expected US investment-grade spreads to be around 82 basis points in the first quarter.
Overdue Correction
To Bank of America Corp. the recent selloff signals a correction after a yearslong rally — at least for riskier high-yield debt.
“Cracks that appeared in the credit market last week culminated into a fracture this week,” BofA strategists led by Neha Khoda wrote. “HY entered this period of volatility priced to perfection, and a perfect economy it is not.”
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