The Credit Edge by Bloomberg Intelligence Polus Adds Credit Shorts, Sees Default Mountain Ahead
May 22, 2025
Robert Dafforn, Chief Investment Officer at Polus Capital Management, discusses the looming threats in the credit markets. He warns that tariffs are pushing more companies toward default. He describes the current situation as 'foothills before the mountain,’ anticipating increased delinquencies amid high interest rates. Dafforn highlights specific sectors ripe with trouble, including chemicals and consumer goods, and suggests that distressed debt could offer 'equity-like returns' for savvy investors navigating this complex landscape.
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Tariffs Reshape Economic Outlook
- Tariffs have shifted the economy from a potential shock to a costly, longer-term trade rewiring.
- This will medium-term harm US manufacturing and import-heavy sectors.
Late Cycle Industrial Recession
- The current industrial recession has been ongoing since 2022 without a clear recovery.
- The latest shocks, likely tariffs, could deepen the downturn further along this late economic cycle.
Credit Market Fragility Explained
- High-yield credit has expanded massively post-GFC amid reduced scrutiny due to passive investing growth.
- The rise in interest rates with subdued growth reveals a fragile market prone to defaults.