A decreasing credit quality
The refinancing sensitivity increases with a decreasing credit quality. This means that weak B- and C-rated companies are the most refinancing sensitive. There is a close relationship between the ratings cycle and the Fed fund cycle. Atight Fed policy goes hand in hand with a lower amount outstanding of CCC paper. If the Fed switches to an easing mode the proportion of CCC-rated bonds will increase in the credit market. AFed tightening policy goes along with credit rating upgrades whereas an easing policy cycle is usually associated with credit rating downgrades. This is because the effects of the Fed policy will have an impact on the credit markets with a time lag of several months.
Asteepening of the treasury curve – driven by declining short-term rates will provide the credit market with liquidity, which in turn helps to lower default rates. In this scenario, companies will have easier access to liquidity (e.g. bank loans, debt and equity markets).