Morningstar credit analyst John Likos said July has already seen high-yield credit change its credit spread trajectory.
“Following [US Federal Reserve chair] Janet Yellen’s semi-annual testimony to congress on 15 July, fund flows in the high-yield market turned sharply negative,” said Mr Likos.
Ms Yellen’s comment that “valuations appeared stretched” for lower-rated corporate debt prompted the withdrawal of more than US$4,000 million from high-yield mutual funds and exchange-traded funds in a two-week period, he said.
“In recent times, any such widening has been snapped up by the market, so we wait to see if this scenario plays out again during August,” Mr Likos said.
While global markets have proved resilient to recent geopolitical events, he said, “the key concern remains a tail risk scenario playing out”.
“The risks of a hard landing in China have subsided somewhat during July following relatively strong data compared with previous months, but this by no means alleviates our concern regarding slowing growth and economic rebalancing fallout in the region,” Mr Likos said.
The other risk of concern, according to Mr Likos, is that of yield re-pricing in the US as the Federal Reserve continues to remove liquidity via tapering.
“Although we witnesses further tightening during July, we expect US yields to begin to normalise into late 2014,” he said.
