Before reality sets in

The economic shock from Covid-19 is being underestimated. This is natural when the immediate priority is safeguarding human life. This will require a far larger policy response than is currently envisioned. Corporate debt has proved highly vulnerable, particularly in the higher-yielding space, bordering investment grade and junk. Indeed, spreads over US Treasuries have blown out 1000bps and more than double that in the sectors front and centre of the crisis. Arguably much of this paper is junk, certainly in those sectors that already faced structural pressures. But as an asset class overall, the blow out in yields should not prove enduring. And in the post Covid-19 world, when we get there, yield will be an even rarer beast.

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