A downward sloping credit curve assumes that long term prospects for the company, assuming it survives it short term repayment turblence look good.
However, a downward sloping yield curve usually is indicative of an upcoming recession/trouble in the financial sector.
So it seems like there is a difference in the philosophy behind each of the credit moves. Why wouldn’t the credit curve and the yield curve move in the same direction depending in the state of the financial assets they are based upon?
The credit curve applies to a particular company.
The yield curve applies to the overall economy.
Is there some reason to believe that the outlook for a particular company and the outlook for the overall economy must be identical? Or even similar?
They both pretty much work in direct proportionality. Also, a downward sloping yield curve is indicative of an “improving economy”. The reason your yields fall is due to lower perception of risk and improving certainty of cash flow.
Inverted yield curve is the first sign of a recession, unless I could be wrong (this is what i learned in school).
You would still expect the philosophy to be the same between the yield curve in credit curve.
For example, if the yield curve is upsloping, then this suggests that the risk of cash flows is higher into the longer term, which then suggests that there is more risk in the long term cash flows in the economy (cash flows to investors from the aggregate stock and debt markets).
Not sure how this would be different between the yield curve and credit curve.