The Credit Edge by Bloomberg Intelligence Credit Market Calm Is at Odds With High Default Risk, Schwab’s Martin Says
Jun 5, 2025
Collin Martin, Director and Fixed Income Strategist at the Schwab Center for Financial Research, discusses the paradox of a rallying credit market amidst high default risks. He warns of investor complacency and low interest coverage ratios among vulnerable borrowers. The conversation dives into private credit risks, floating-rate and preferred debt opportunities, and how trade wars impact consumer confidence. Martin emphasizes the need for cautious investment strategies in this complex landscape, where rising defaults could challenge the current calm.
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Credit Market Complacency
- Current credit spreads suggest markets are slightly complacent about risk despite economic uncertainties.
- High yield spreads near 3% are below long-term averages, signaling caution.
Elevated Defaults Among Weakest Borrowers
- Default rates remain elevated around 4%, near long-term averages, with CCC-rated companies at highest risk.
- Interest coverage less than one for weakest borrowers signals ongoing default risk.
Investment Strategy Advice
- Favor intermediate-term maturities to balance interest rate and reinvestment risks amid yield uncertainties.
- Prioritize higher credit quality instruments like investment grade bonds for better risk compensation.