Credit Markets Do Not Recognize Default Risk
The high yield market in particular has yet to recognize that default risk has increased given that credit yields have increased. Banks have bent over backwards to avoid high profile defaults with financial alchemy such as PIK loans. Credit risk will become more difficult to hide as yields continue to move higher in concert with prices (core CPI will remain above 3% and oil prices are moving higher). Powell declaring victory over inflation is akin to Bush declaring “Mission Accomplished” in Iraq in 2003.
