Yields on triple-B industrial credits, which recently averaged 170 basis points over 30-year Treasuries, are due to tighten, predicted John Lonski, chief economist at Moody's Investors Service. He said fundamentals remain strong, which should narrow spreads.
From a macro perspective, the economist anticipates fair value for Baa-rated industrials is in the neighborhood of 135bps based on the widening of profit margins and above-trend economic growth. "I'm not of the opinion the latest widening is a trend we're about to observe for the next 12-24 months," he noted. To be sure, Lonski said market skittishness can't be separated from credit fundamentals and there remains the possibility a pick-up in leveraged buyout activity, for example, which could cause spreads to widen further.
