Corporate Credit Snapshot – 31 January, 2018

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  • Credit markets globally were impacted by higher rates, resulting in negative performance from investment grade while high yield registered gains
  • In the US, economic growth continued apace with fourth-quarter GDP coming in at 2.6% (annualised) boosted by an increase in consumer spending
  • Economic growth in Europe also continued to pick up, although data releases indicating an uptick in inflation raised the spectre of a more hawkish approach to monetary policy in the future
  • The performance of emerging market corporates was in-line with their US and European counterparts. By region, African and Latin American corporates were among the strongest performers while credits in the Middle East and Asia were weaker

US
It was a volatile start to the year for US corporate credit markets; government bonds sold off on fears of a more aggressive stance by central banks to end monetary easing, combined with concerns for a spike higher in inflation after the recently-implemented US tax cuts. As a result, the more rate-sensitive investment grade segment of the market sold off, while higher yielding credits held up under pressure. Economic growth continued apace, with fourth-quarter GDP coming in at 2.6% (annualised) boosted by an increase in consumer spending and highlighting that the economic recovery is in full swing. Finally, inflation data also moved higher with core CPI rising 0.3% in December. Chair Yellen’s last meeting at the Federal Reserve (“Fed”) kept the federal funds rate unchanged at 1.25-1.5% during the January meeting and maintained expectations that the next rise would be in March, although the inflation outlook was increased – a move away from the Fed’s more dovish December language and a reflection of increasing inflationary pressures. The brief shut down of the Federal Government during the second half of the month, after Congress failed to come to an agreement over funding, had little impact on bond markets.

Europe
Themes dominating European credit markets in December continued into the New Year, with investment grade feeling increased pressure from rates while high yield held up relatively well. Growth continued to pick up with myriad indicators highlighting the ongoing strong recovery in the region; the eurozone manufacturing PMI reached its highest number since the survey began in 1997. Mario Draghi was keen to emphasise that the European Central Bank (“ECB”) would continue to prove supportive for the economy by maintaining stimulus for as long as needed. However, recent data releases indicating an uptick in inflation raised the spectre of a more hawkish approach to monetary policy in the future. In Germany, Angela Merkel’s struggle to form a new government and continue as Chancellor reached a breakthrough after the Social Democrats voted to agree on negotiating the terms of a new coalition. This marks the start of discussions on formulating the next coalition government to provide Merkel the much-needed mandate needed to serve a fourth term in office.

EM
It was a positive start to the year for emerging market corporate bonds, although performance by rating was reflective of the wider investment environment where high yield again outperformed investment grade credit with the latter feeling the impact of higher rates. By region, African and Latin American corporates were among the strongest performers while credits in the Middle East and Asia were weaker. Despite the S&P’s downgrade of Brazil’s credit rating early in the month, Brazilian corporates were among the best performers in January. Ex-President Lula’s appeal against a conviction for corruption was rejected, diminishing the chances of his participation during national elections later in the year; his re-election could result in a backward step for market-friendly policies in the country. With the price of oil continuing to move higher, commodity-related sectors and countries benefited accordingly. However, this positive dynamic did not apply across the board; Argentinian corporates were among the weaker performers on the month after the central bank made a surprise 75bps interest rate cut, increasing fears the country would be unable to meet its inflation target. In South Africa there were further signs of an end to Zuma’s presidency. The ANC’s national executive committee began discussions to remove him from power and replace him with the recently-elected head of the ANC, Ramaphosa; a discussion which benefited corporates in the country.