A drop in bankruptcy filings suggests that credit conditions are improving, despite a downturn that was looking almost inevitable last year.
As long as growth remains in a cyclical upswing, the path of least resistance for credit spreads is likely to be further tightening.
After the “excitement” of CPI revisions (Friday’s data out of China, in my view, was more consequential for US inflation), I thought I’d take another look at bankruptcy filings in the US.
They were diverging higher from credit spreads, suggesting “true” underlying credit conditions were deteriorating, despite what spreads were saying.
But bankruptcy filings are now falling sharply, in concert with the tightening in credit spreads.
The delay in the US recession and re-accelerating growth means that perhaps the US has also delayed a credit downturn that looked on the cards last year.
Credit flows seem to think so, rising to their highest since September 2020 on a four-week moving-average basis, according to BofA.
Nevertheless, leading data show the US growth revival could run out of steam as early as the summer, which would leave spreads open to a sharp re-pricing as flows reverse.
