Corporate bond investors should watch credit spreads to gauge potential credit downgrades, according to S&P Global Ratings.
The research house noted the US Federal Reserve’s decision to increase rates at their last meeting, and S&P Global Ratings credit analyst Terry Chan said the hike could affect risk pricing.
“We see a further upward repricing of risk, and hence higher credit spreads, to be an elevated and increasing risk as investors shy away from the 'lower for longer' axiom of past years,” he said.
S&P Global Ratings said investors had pushed the yield curve up at the longer end following the Federal Reserve’s 25 basis point hike in December, noting that more increases were expected throughout 2017.
“Credit spreads are the additional yield required for taking on risk. We found a strong correlation between debt downgrades and spreads,” said S&P Global Ratings credit analyst David Tesher.
The research house cautioned that it could lower ratings on its covered corporates by 9 per cent in the event that spreads reached the levels seen in the global financial crisis.
“This would come on top of downgrades already expected in its base-case scenario for the current year, elevating the corporate downgrade ratio to more than 20 per cent from 2015,” the company said.