Are credit investors nervous about recession risk?

There's understandably been a lot of attention paid to US stocks recently, but there's also something quite interesting happening in The US bond market. Corporate bond spreads that reflect the additional yield on corporate bonds above government bond yields have risen dramatically in the past month. So what should we make of that? Does it mean that bond investors are hunkering down for a recession? I'm Alison Nathan, and this is Goldman Sachs Exchanges. Today, I'm joined by Lotfi Karawi, our chief credit strategist and the head of credit mortgages and structured products research. Lotfi, welco

you for having me. So

Lotfi first catches up. There's a lot going on. Give us some sense of what's been happening in the corporate bond markets in recent weeks.

Yeah. So there is this general perception among many people that corporate credit has sort of been resilient, and it's outperformed its beta relationship to the equity market. That's actually just optical illusion. If you look at how much spread widening we've had since the peak of the market in mid February, it's been exactly equivalent to what you should expect with an S and P that is down roughly eight to eight and a half percent. And so I think what's creating a little bit of confusion is really that the starting level is so tight. And, optically, it looks like investment grade spreads are

Well, just to clarify, we started at a very high level of the S and P 500 too. Absolutely.

Absolutely. So

we're still at high levels relative to history, and we are coming from very tight levels in credit that are now wider. So talk to us about what's driven this big increase in spreads.

Policy uncertainty. Basically, the gradual realization that we are in a macro environment was structurally higher volatility and certainly a lot higher volatility than many had anticipated going into the year. And so I would view that rebuild the premium as essentially a process in which spreads have to realign themselves with that new reality. We can talk about the impact of tariffs, but at the end of the day, what they do, they essentially shift the trade off between growth and inflation in a direction that is not that friendly for risk assets and credit in particular. And so until you recal

But just to be clear, fundamentals themselves are not showing signs or meaningful signs of deterioration, and this is just all about concerns that they might given some of these growth concerns in particular and inflation concerns you just highlighted? Yeah.