The risks to US growth remain high. It is now almost two years since the Fed started to raise rates. This has been one of the most aggressive tightening cycles in history, especially when the Fed Funds Rate is measured in real terms.
It is hard to imagine that such tight policy does not eventually cause recession in the US. The question is simply on the timing. Labour market dynamics — both wage growth and quits rates — are softening, but not collapsing. Consumer spending continues to surprise to the upside, but the savings buffer accumulated during the pandemic has been largely run down.
For credit allocators, the path matters more than the destination. A slow grind into a mild recession is materially different from an abrupt downturn. We continue to favour shorter-duration, senior-secured exposures, with a focus on managers who have demonstrated underwriting discipline through prior cycles.
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