2021 U.S. Credit Outlook

April 6, 2021

 A Pandemic of Disruption 

The Covid-19 pandemic arguably catalyzed at least three major paradigm shifts of importance to credit markets. 

• For one, the birth of “Corporate QE” represents a new market structure for corporate spreads, one that aided dramatic reversal of spreads in and thus helped usher in a new “new normal” of not just lower rates but also tighter spreads. 

• Second, the epic adjustment of cross-sector spending required to accommodate social distancing behaviors is likely to undergo comparably large spending reversals as the easing of pandemic constraints releases pent-up demand. And while pent-up spending should help drive strong GDP growth, some businesses will benefit less than others, and thus struggle under their more levered capital structures. 

• Third, the Nasdaq’s remarkable rally and sustained out-performance of the broader market reflects the pandemic’s hastening of the “tech divide.” Tech-savvy innovators are thriving at the expense of tech-lagging incumbents, leading to a “K-shaped” recovery of corporate growth featuring an unusually high number of both winners and losers. 

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