Despite earlier expectations of a weaker U.S. economy and lower asset prices this year, markets are still rallying. Equity markets are approaching previous record highs from late 2021, and high-yield option-adjusted spreads are at around 400 basis points, leaving distressed debt investors uncertain about the extent of future opportunities.
However, there are ongoing signs of caution, including a historically elevated federal funds rate, a decrease in interest rate coverage, rising default rates and an inverted yield curve, which has traditionally served as a reliable indicator of impending economic challenges.
To help investors better understand the current environment, PitchBook spoke with Peter Cecchini, director of research at Axonic Capital, for insight as to why a recession may still be imminent and which industries may be the most at risk.
Cecchini currently holds a bearish stance. He envisions a recession likely to emerge by late 2023 or early 2024, which could drive default rates close to 8%. Aligning with this anticipated default level, he forecasts the high-yield Option-Adjusted Spread (OAS) to reach 1,000 basis points at some point in 2024.
Regarding industries that may be especially vulnerable over the next six months, Cecchini identifies transportation companies as notably exposed within the current market climate. He points out that trucking equities are trading at elevated valuations and are neglecting to consider the associated sector-specific risks.