Good times for credit finally end next year, says Societe Generale

Bloomberg

The great credit party that’s taken yield premiums in major markets down around lowest in a decade is probably months away from an end, as central banks normalise monetary policy and the economic outlook softens, Societe Generale SA predicts.
“We expect next year to be a transition year, when the ultra-low yield environment finally starts to lose its grip,” Societe Generale credit strategists Juan Esteban Valencia and Guy Stear wrote in a note. “The US and the eurozone are heading for an economic slowdown in 2019, and given the rising levels of corporate leverage, this should have an impact on credit.”
US investment-grade bond premiums will widen by mid-2018, with European counterparts following suit, as credit markets price in the economic slowdown, they wrote. “The sword falls in 2H,” they predicted in a report that recognized last year’s annual outlook proved too bearish. Societe Generale had anticipated political risk to hurt credit in 2017, but changed tack by March as that didn’t pan out.
Now, with global premiums having fallen further, “credit looks very pricey indeed,”
they wrote. “Emerging market
and high-yield markets are the most alarming.”
Among their predictions and observations are US investment-grade yield premiums over government bonds are forecast to widen by 45 basis points, to 165 basis points, over the year to the fourth quarter of 2018. Spreads on US high yield, including emerging markets, are seen widening by more than 130 basis points, to 480 basis points. Euro investment-grade premiums seen rising 25 basis points to 125 basis points.
Euro high-yield premiums projected to climb about 1 percentage point, to 3.8 percent. The predictions will depend crucially on the economic growth outlook. “If the slowdown begins to take shape, we suspect the high levels of leverage will push spreads wider more quickly
than we forecast.”
Credit market slumps tend to be triggered by a single sector, such as telecommunications in 2002-3 and US housing in 2007-8. Potential flashpoints going forward are China’s property market and US technology, where balance-sheet leverage “has grown sharply.”