2022 IG misses forecasts and ends with a whimper
2022 came below those expectations with a final tally of $1.184trn or 16% lower than the final tally of 2021 ($1.41trn). March was the highest month of issuance with nearly $230bn – exceeding expectations for the month by over $90bn. It was a rocky year of hit and misses, however, as five months missed forecasts, with the largest miss coming in September (-$66bn). IG ended with a whimper as only $4bn has priced in December.
At the start of the year, forecasts for the year ranged from $1.27trn to $1.34trn (link), but as dealer forecasts were adjusted with the start of rate hikes by the Fed, the actual versus rolling forecast ended up above the adjusted forecast total by modest $14.7bn.
Bracing for recession and wider credit spreads – Deutsche
For 2023, analysts at Deutsche are bearish on credit spreads and increase its year end IG spread target for +235bps, or a +135bps increase from the level at time of writing.
However, even with a bearish 2023 outlook, Deutsche acknowledges “that yields and spreads have made a huge adjustment in 2022” and with government bonds “now likely to be more range trading for 2023, and possibly with a slight downward yield bias, total returns will be a lot better in 2023 than in 2022.” Indeed, Deutsche’s full year total return forecast ahead for USD IG is -0.2% and for USD HY -3.3%.
“And a reduction in rate volatility that will occur before a US recession emerges may spark a tactical bear-market rally, from now until early 2023,” Deutsche projects, but it judges that “the major 2023 theme will be the likely US recession in H2” and “whether this happens and how severe it is will make or break 2023.”
Thus, Deutsche views that the main driver for 2023 “is the combination of still relatively high rates, a tough US recession, and what crisis that might subsequently trigger” and “if we’re wrong on the US recession call, or if it is mild and without systemic risk, then we will be wrong on our forecasts” which it adds ruefully that “we suspect most readers will hope we are.”