In a development that’s noteworthy, but not wholly surprising, US credit investors are concerned about a recession.
How concerned, you ask? Well, the perceived recession probability in a new survey of BofA clients is 25% over the next 12 months, which the bank’s Hans Mikkelsen notes is “the highest since the previous record of 23% from July 2016 when we first asked that question”.
The September edition of the survey polled more than 100 money managers, insurance companies, hedge funds, pension funds and banks, including 63 in high grade, 16 in high yield, five in leveraged loans and nearly two-dozen in cross-credit.
As you can see on the right, perceptions of “recession/deflation” risk jumped in the September survey versus July, following an August that found bonds surging, the 2s10s inverting and voters expressing palpable concern about the outlook for the economy amid the seemingly intractable trade war.
“Recession risk rose to third place on the list of credit investors’ biggest concerns, displacing geopolitical risk, while the top-2 risks remain trade war and China”, Mikkelsen goes on to detail.
Still, he notes that “more than 4 in 5 investors we surveyed expect a trade deal eventually and only 14% trade war escalation” (that latter figure is up from 7%, though).
One other thing – note that the survey period was September 9th to 13th. Over that stretch, there was a string of reasonably positive US data. The read-through is that recession perceptions might have actually been higher prior to that data and before news that the US is still set to host China for principal-level trade talks in Washington next month.
“With the survey period being after the rebound in critical US economic data and a more positive tone between the US and China, it is plausible that 25% represents a meaningful decline from investor sentiment last month”, Mikkelsen observes.