High-Yield Credit Looks Resilient: Morgan Stanley

Last week’s bond sell-off has focused investors’ attention on fixed income, asking whether high yield debt in particular could be on shaky ground after years of historically low interest rates, tight credit spreads, and covenant lite debt. Morgan Stanley analyst Andrew Sheets argues that markets are behaving differently now than they did during the 2013 taper tantrum, and that it’s equities that should be more concerned about rising real rates.

“The fear, generally constructed, is that low rates reflect easy money, and this easy money has found its way into credit markets, particularly high yield. As this unwinds, watch out,” Sheets writes. “But there is also a competing theory for which we have significant sympathy.”