The latest analysis from Dominic Pappalardo, chief multi-asset strategist at Morningstar, reveals important trends in the U.S. corporate credit market, such as:

• Market Stabilization: Following August’s volatility, September has seen a return to stability in U.S. corporate credit, with investment grade and high yield option-adjusted spreads nearly matching pre-August levels.
• Fed Rate Cut Impact: The Federal Reserve’s recent 0.50% rate cut is expected to positively impact corporate credit by easing concerns about future refinancing costs for borrowers.
• Cautious Outlook on High Yield: While high yield fundamentals show some improvement in EBITDA and sales growth, declining cash-to-debt ratios suggest a need for caution in this sector.

“With the Fed bringing benchmark rates lower, and foreshadowing more cuts, risks around refinancing should start to erode,” Pappalardo said. “Additionally, as benchmark rates decline, investors may be more willing to move down in quality and allocate to credit sectors in place of Government Bonds to ensure they can still reach desired income bogeys.”