(Bloomberg) -- Bryan Whalen, whose fixed income team at TCW Group oversees more than $170 billion, warns that credit markets will probably face a correction after investors have stampeded into corporate debt.

“We think the pricing is totally inconsistent with the potential risks out there, and we think at some point probably this calendar year you’re going to get a reckoning in the credit market,” Whalen said Friday on Bloomberg Television’s Real Yield. “Not everything in the economy is as rosy as they’d like to believe.” 

Slowing US jobs growth in April underscored how difficult it is for investors to time the market. Bonds broadly rallied after the government said the unemployment rate unexpectedly rose, signaling that demand for workers is starting to moderate. 

Yields on two-year Treasuries, which had topped 5% days earlier, slipped to roughly 4.8% by midday as investors began to weigh the potential for the Federal Reserve to start cutting interest rates as soon as September. But a weaker economy tees up the risk of losses on both investment-grade and high-yield bonds if companies face downgrades or outright defaults. Corporate debt could also lose value if pricing proves to have been propped up by investors’ overexuberance.

Expectations of an eventual drop in interest rates has spurred demand for debt across corporate America in 2024, bringing spreads on investment grade bonds on average to the lowest levels in years. Billions in new high-yield debt has hit the market as well, with investors’ appetite still strong. Yet returns for US investment-grade bonds have fallen roughly 2.2% this year while junk bond returns have been a mere 0.95%, according to Bloomberg indexes. 

“Picking the right month when the Fed actually goes isn’t the right part of the analysis. It’s: What’s going to be the state of the world, what’s going to be going on with inflation, what’s going to be going on with growth when they actually do start to cut,” Whalen said. “We’re seeing slowing all over the economy.” 

A stock-market rally in 2024 is keeping consumer spending and confidence high, Whalen said, but Americans are spending on credit cards, and drawing down on savings. That type of sentiment can “turn on a dime,” he said.

A weaker economy tees up the risk of losses on both investment-grade and high-yield bonds if companies face downgrades or outright defaults. Corporate debt could also lose value if pricing proves to have been propped up by investors’ overexuberance.

“History would suggest that by the time the Fed actually starts cutting, the economy’s on the downward trend, it’s got downward momentum,” Whalen said. “More likely than not, in our estimation, the Fed’s going to have to go more aggressively once they finally do start to go.” 

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