Corporate Credit Snapshot - May 2024

May 8, 2024

Please click here to download the full report.

US

In the US, credit markets generated negative returns as rates moved higher in April driven by sticky inflation prints.  Spreads were largely unchanged despite significant intra-month volatility on the back of headlines from the Middle East and the expectation that Fed rate cuts will continue to be pushed back.  For reference, at the end of April, the market was expecting just one Fed rate cut this year in December, compared to almost three cuts expected at the beginning of the month.  We believe that there could be continued rate volatility through the year due to conflicting economic data releases. The US elections in November could also introduce rate volatility stemming from differing economic messages and policies.  Primary market activity for both high yield and investment grade continued apace, and coupon/carry remains a meaningful driver of total returns.

EUROPE

In Europe, credit markets generated negative returns as rates moved higher in April driven by sticky inflation prints.  Spreads were largely unchanged despite significant intra-month volatility on the back of headlines from the Middle East and the expectation that Federal Reserve (Fed) rate cuts will continue to be pushed back.  We expect further divergence between the Fed and European Central Bank (ECB); at the end of the month, the market was expecting three cuts from the ECB before year-end starting in June, and just one from the Fed in December. This compares to the start of the month when both central banks were expected to cut roughly three times this year, starting in June. The US elections in November could also introduce rate volatility stemming from differing economic messages and policies.  This month Europe outperformed the US, and high yield outperformed investment grade.

EM

Emerging Market (EM) debt generated negative returns as rates moved higher due to sticky inflation prints and a pickup in the global manufacturing cycle.  One of April’s key drivers came from sovereign ratings action.  Fitch downgraded Panama to high yield (HY), highlighting the sovereign’s fiscal and governance challenges, exaggerated by the recent mine closure and reliance on external financing.  In China, Fitch revised its sovereign outlook to negative, citing concerns around public financing and the property sector. Meanwhile, Peru was downgraded by S&P to a BBB- rating, noting political uncertainty and its negative effect on growth. Israel also received the same treatment on the back of the escalation in geopolitical tensions. On a more positive note, the ratings agency re-affirmed Hungary and Romania’s current BBB- ratings. The growth picture in Asia surprised on the upside with both China and Korea’s first-quarter GDP coming in higher than expected due to industrial production, strong exports, and manufacturing investment. EM central banks largely continued their rate cutting trajectory, with cuts from Peru, Argentina, and Hungary (which slowed its pace of easing in line with expectations). The exception came from Indonesia, which surprised the market with a hike to anchor interest rate stability and combat rising commodity prices.

OUTLOOK

Year to date, spreads and coupons continue to effectively buffer the negative total return impact of rising government yields, contributing to positive excess returns across global credit.  In our view, prices generally remain discounted, providing cushion for potential additional interest rate volatility.  Globally, trailing 12-month defaults across high yield markets remain below the long-term average due to solid operating results and an open refinancing market.  Looking ahead, we anticipate continued primary market activity as companies address upcoming maturities and investors deploy cash balances.  We expect the “higher for longer” theme to remain intact based on continued economic strength, and are managing credit spreads, positioning, and portfolio duration profiles accordingly.  While credit spreads are inside long-term averages, we believe that credit investors who focus on yields that are above long-term averages are being appropriately compensated during this period of continued economic expansion.

 

Past performance is not a reliable indicator of current or future performance. 

Muzinich views and opinions are for illustrative purposes only and not to be construed as investment advice.

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of March 2024 and may change without notice.

------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Important Information

Muzinich and/or Muzinich & Co. referenced herein is defined as Muzinich & Co., Inc. and its affiliates. Muzinich views and opinions. This material has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested. Rates of exchange may cause the value of investments to rise or fall. Emerging Markets may be more risky than more developed markets for a variety of reasons, including but not limited to, increased political, social and economic instability; heightened pricing volatility and reduced market liquidity.

Any research in this document has been obtained and may have been acted on by Muzinich for its own purpose. The results of such research are being made available for information purposes and no assurances are made as to their accuracy. Opinions and statements of financial market trends that are based on market conditions constitute our judgment and this judgment may prove to be wrong. The views and opinions expressed should not be construed as an offer to buy or sell or invitation to engage in any investment activity, they are for information purposes only.

This discussion material contains forward-looking statements, which give current expectations of a fund’s future activities and future performance. Any or all forward-looking statements in this material may turn out to be incorrect. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Although the assumptions underlying the forward-looking statements contained herein are believed to be reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurances that the forward-looking statements included in this discussion material will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation that the objectives and plans discussed herein will be achieved. Further, no person undertakes any obligation to revise such forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

United States: This material is for Institutional Investor use only – not for retail distribution. Muzinich & Co., Inc. is a registered investment adviser with the Securities and Exchange Commission (SEC). Muzinich & Co., Inc.’s being a Registered Investment Adviser with the SEC in no way shall imply a certain level of skill or training or any authorization or approval by the SEC.

Issued in the European Union by Muzinich & Co. (Ireland) Limited, which is authorized and regulated by the Central Bank of Ireland. Registered in Ireland, Company Registration No. 307511. Registered address: 32 Molesworth Street, Dublin 2, D02 Y512, Ireland. Issued in Switzerland by Muzinich & Co. (Switzerland) AG. Registered in Switzerland No. CHE-389.422.108. Registered address: Tödistrasse 5, 8002 Zurich, Switzerland. Issued in Singapore and Hong Kong by Muzinich & Co. (Singapore) Pte. Limited, which is licensed and regulated by the Monetary Authority of Singapore. Registered in Singapore No. 201624477K. Registered address: 6 Battery Road, #26-05, Singapore, 049909. Issued in all other jurisdictions (excluding the U.S.) by Muzinich & Co. Limited. which is authorized and regulated by the Financial Conduct Authority. Registered in England and Wales No. 3852444. Registered address: 8 Hanover Street, London W1S 1YQ, United Kingdom. 2024-02-07-12854