Forex Flash: Credit gridlock scenario – Goldman Sachs

A sluggish post-bust recovery, ultra-low risk-free yields and significant corporate surpluses have meant that non-financial corporate credit has been the asset of choice for many investors in the post-financial-crisis period. EM sovereign credit, while a smaller and less liquid market than US corporate credit, shares similar features. According to the Economics Research Team at Goldman Sachs, “As a consequence, a steady tightening in spreads and the ultra-low level of risk-free yields have pushed yields on corporate credit and EM US Dollar credits to decade lows.”

“For most of 2013, there is little in our forecasts to suggest that this basic credit-supportive environment is set to shift. Credit fundamentals are still very healthy, but improvements may have peaked and incentives for corporate releveraging are strong. While our best guess is that the search for yield will continue and that spreads should grind lower, our baseline forecasts show limited upside for the year ahead and it will be harder for credit assets to offer ‘equity-like’ returns, as in the past few years.” the team adds.