Problems loom for US credit markets and the global economy, strategist says

  • According to Michael Howell, chief executive officer at global research group Crossborder Capital, as monetary policy tightening takes place, there could be strong consequences for credit markets.
  • While the yield curve is signalling upcoming problems, credit market spreads aren't remaining tight. Howell believes it is just a matter of time until the credit market catches up and the spreads widen.
Traders and financial professionals work ahead of the closing bell on the floor of the New York Stock Exchange (NYSE), June 15, 2018 in New York City.
Drew Angerer | Getty Images

There are signs of problems emerging in the U.S. credit market that could also hurt stocks and the global economy, a strategist told CNBC on Tuesday.

Companies and governments use credit markets to issue debt and obtain new financing. In the wake of the sovereign debt crisis, central banks decided to intervene in the credit market by buying high levels of debt — a step aimed at revamping their own countries' economies.

However, as the global economy has improved, central banks have started to ease these debt purchases for the past year or so. According to Michael Howell, chief executive officer at global research group Crossborder Capital, as monetary policy tightening takes place, there could be strong consequences for credit markets.

"Our concerns are, looking over the next 12 months, looking into the U.S. economy (in) 2019, it looks as if a credit problem may be emerging and that's what the yield curve is principally telling us," Howell told CNBC's "Squawk Box Europe."

"I think there are risks in credit, (because) there's been a huge spiralling of credit issuances over the last few years; a lot of companies have gone outside of banks to raise money and those deals have been priced very aggressively. Look at spreads, they are very tight — they shouldn't be as tight as they are."

Spreads compare the difference between U.S. Treasurys and corporate bonds. If they are tight, the interpretation that the market makes is that those corporate bonds are not very risky.

But, according to Howell, the image that the spreads are showing at the moment is incorrect.

"There's a huge anomaly between what the U.S. yield curve is telling you and what the U.S. credit markets are saying," he added.

The yield curve — a line that plots short and long-term interest rates — has flattened over the last month or so. Many market players have started predicting that the curve will actually invert next year. This is generally interpreted as a sign that economic turmoil is just around the corner.

Though the yield curve can be perceived as signaling an upcoming economic slowdown, credit spreads have remained tight and thus imply that credit markets may be under-pricing the relative risk of holding corporate bonds. Howell believes it is just a matter of time until the credit market catches up and the spreads widen.

A widening in credit spreads means that investors require additional returns to hold corporate bonds — indicating that there is more risk and that economic conditions are expected to deteriorate.

In a note earlier this month, Crossborder Capital said that wider spreads are not just a risk for the United States, but also to other international markets, "such as European high-yield and emerging markets credits" that "could be sucked into the vortex."