Goldman Sachs Global Credit Trader: The Quality Crossover
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Goldman Sachs introduces the concept of a quality crossover in its global credit trader note, arguing that higher-quality credit is positioned to outperform lower-quality credit in the current environment. As the economic cycle enters its later stages, the bank recommends that investors shift toward higher-rated credit assets, emphasizing that quality will be the defining differentiator for risk-adjusted returns.
The thesis rests on a clear causal chain: late-cycle dynamics increase earnings pressure on corporates, raising default risk for lower-quality issuers. As investors seek safer assets, demand for high-quality credit increases, causing spreads to tighten or remain stable, while lower-quality credit spreads widen. The report highlights that both euro and dollar markets show limited pricing of fallen angel risk, with a significant proportion of potential fallen angels lacking negative outlook assignments from rating agencies.
Charts indicate that BB spreads in the euro market have already moved meaningfully, with BB versus BBB spreads remaining near compressed levels. Since 2021, rising stars in the euro market have been dominated by banks and financials, while energy-intensive sectors face elevated fallen angel risk. Notably, fallen angels in the euro market tend to underperform following downgrade, a pattern that diverges from the dollar market. Goldman recommends increasing allocation to investment-grade credit, though the report does not specify individual securities or explicit price targets.
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