Credit Assets Look Attractive as Long as U.S. Interest-Rate Rises Look Unlikely

As the U.S. economy continues to recover from the COVID-19 pandemic, investors are keeping a close eye on interest rates and their potential impact on credit assets. With the Federal Reserve hinting at a potential rate hike in the near future, investors are wondering whether now is the right time to invest in credit assets or if they should wait for a more opportune moment. In this article, we will explore the relationship between interest rates and credit assets, and discuss why credit assets may still be an attractive investment option as long as U.S. interest-rate rises look unlikely.



Credit assets, such as corporate bonds and private debt, tend to perform well in low interest-rate environments. This is because low interest rates make borrowing cheaper for issuers, which in turn reduces their cost of capital and increases their ability to service their debt obligations. Additionally, low interest rates can lead to a compression of banks' net interest margins, as the income from interest on loans decreases while the cost of funding remains relatively stable (Bikker and Vervliet, 2018). This can result in a decrease in the demand for credit assets, as investors seek higher-yielding alternatives.

However, if interest rates remain low and the economy continues to recover, credit assets may still be an attractive investment option. This is because a recovering economy can lead to increased demand for credit, as companies look to expand their operations and invest in new projects. Additionally, a low interest-rate environment can lead to a decrease in the cost of capital for issuers, which can result in higher earnings and cash flows, making their debt obligations more affordable.

One of the key factors that investors should consider when evaluating the attractiveness of credit assets is the yield curve. The yield curve is a graphical representation of the interest rates, at a particular point in time, of bonds having different maturities. A steepening yield curve can indicate that the market expects higher interest rates in the future, which can lead to a decrease in the demand for credit assets. Conversely, a flattening yield curve can indicate that the market expects interest rates to remain low, which can lead to an increase in the demand for credit assets.

In the current environment, the U.S. yield curve has been relatively flat, with long-term interest rates remaining low despite the Fed's hints of a potential rate hike. This suggests that the market may be expecting interest rates to remain low for the foreseeable future, which could be a positive sign for credit assets.



Another factor that investors should consider when evaluating the attractiveness of credit assets is the credit spread. The credit spread is the difference between the yield of a corporate bond and the yield of a comparable government bond. A widening credit spread can indicate that investors are becoming more risk-averse and are demanding higher yields to compensate for the increased risk of default. Conversely, a narrowing credit spread can indicate that investors are becoming more optimistic about the economy and are willing to accept lower yields in exchange for the increased safety of government bonds.

In the current environment, credit spreads have been relatively narrow, with corporate bond yields remaining low despite the Fed's hints of a potential rate hike. This suggests that investors may be becoming more optimistic about the economy and are willing to accept lower yields in exchange for the increased safety of corporate bonds.

In conclusion, credit assets may still be an attractive investment option as long as U.S. interest-rate rises look unlikely. However, investors should carefully consider the potential impact of interest rates on credit assets and monitor the yield curve and credit spreads closely. If interest rates do begin to rise, investors may want to consider alternative investment options or adjust their portfolio to better manage the risks associated with higher interest rates. By staying informed and remaining flexible, investors can position themselves to take advantage of the opportunities that may arise in the credit asset market.