Calm before the storm − can US high yield weather further rate hikes?

Despite tightening financial conditions, US high yield credit spreads have remained at around pre-Covid levels. But can this last? With its latest 0.75% increase in June, the US Federal Reserve is delivering on its overt aggressive approach, having lifted its target for the federal funds rate to a range of 1.5% to 1.75% since March – the same level of rates last seen before the Covid-19 shock in March 2020.

Therefore, a review of the changes in US high yield spreads during the previous episode of US tightening might provide some insight.

The last time the Fed tightened policy was in December 2015, and it lasted until December 2018, with interest rates rising from 0.25% to 2.50% (Chart 1). So what happened to US high yield spreads during this period?

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