Corporate Credit Snapshot – 13 October, 2017

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  • Global corporate credit returns were positive month-to-date, with EM high yield outperforming.  US high yield generated a coupon-like return
  • With the VIX (volatility index) at all-time lows and the Dow hitting all-time highs, credit continues to provide a steady, carry-like return
  • President Trump is expected to make an announcement on the Federal Reserve Chair/Chairman in the coming days.  The market would likely prefer the continuity of a Yellen Fed, however, Trump is under pressure to deliver a more conservative Chair to his base
  • The ECB is meeting again later this month and we look forward to hearing some details about the Central Bank’s tapering decision.  Even if the ECB cuts future new flows into the program, the ECB will still need to invest each month given proceeds from maturing bonds as well as coupon flows

US
US fixed income returns were positive this month, led by investment grade and US Treasuries.  High yield, while also positive, generated coupon-like returns.  With the VIX (volatility index) at all-time lows and the Dow hitting all-time highs, credit continues to provide a steady, carry-like return.  Economic data has been generally positive despite a backdrop of geopolitical noise.  We expect Q3 data will be somewhat difficult to interpret given the impact of the hurricanes.  We generally expect Q4 economic data to be better given increased spending related to hurricane recovery efforts.  Inflows were generally positive and we did see some new issuance.  We expect issuance to slow as companies enter their earnings quiet period.  President Trump is expected to make an announcement on the Federal Reserve (Fed) Chair/Chairman in the coming days.  The market would likely prefer the continuity of a Yellen Fed, however, Trump is under pressure to deliver a more conservative Chair to his base.  The next potential date for a Fed rate increase is December.  Although the Fed has suggested that a December rate hike is in the cards, it will also be dependent on Personal Consumption Expenditure (PCE) data.  At the moment, PCE figures are at 1.4% and still below the 2% target.

Europe
European corporate credit markets were positive with high yield performing in-line with investment grade corporates.  Given a constructive technical backdrop and fundamentals, it is not surprising that credit markets posted strong, positive performance this month, extending the trend we have experienced so far this year.  The start of October saw a steady flow of new issuance, albeit not as robust as during September.  Market participants generally feel confident which allows also riskier names to come to market.  The European Central Bank (ECB) is meeting again later this month and we look forward to hearing some details about the Central Bank’s tapering decision.  Even if the ECB cuts future new flows into the program, The ECB will still need to invest each month given proceeds from maturing bonds as well as coupon flows.  Thus, any gross tapering announcement will be less in net terms after consideration of amounts that will be reinvested.

EM
Emerging Market (EM) credit generated positive performance for the period with high yield outperforming investment grade corporates.  Almost all sectors (with the exception of consumer) and countries (with the exception of Qatar and Israel) posted positive returns.  The continued strong performance was primarily a function of the continued hunt for yield and technical (inflows) and is notable given the backdrop of geopolitical noise (US-Turkey visa issue, Kurdistan-Turkey, NAFTA).  In Asia, supply from China started to resume after the Chinese National Day with both repeat and new issuers tapping the off-shore market.  The market will focus on the 19th Congress meeting on October 18th and we expect a sovereign issue from China following this meeting.  Outside of China, Asia was generally quiet.  LATAM also saw bond issuance continue with both existing and first time issuers coming to market.  On a relative basis, Mexico was weaker on the back of both cross-border NAFTA noise and local politics as the presidential opposition candidate gains ground.  The Middle East underperformed on a relative basis, primarily due to large sovereign new issues from Abu Dhabi and Saudi Arabia that the market had to digest.  From a supply side basis, inflows remained positive into EM-dedicated bond funds.