Corporate Credit Snapshot – 30 September, 2020

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  • Global fixed income returns were mixed for the month, as loans and government bonds rallied followed by positive European investment grade returns, while global high yield and US and emerging market investment grade lagged
  • Global fixed income declined on the back of geopolitical uncertainties, although we continue to see constructive economic data including higher-than-expected Purchasing Managers’ Index (PMI) numbers from China, promising German retail sales, and US consumer confidence
  • The markets this September seemed mostly guided by doubts surrounding a US fiscal package and the US presidential election, as well as a lack of closure on the Brexit trade deal between the UK and the EU
  • Looking ahead, we continue to closely track how the capital markets are digesting these various geopolitical uncertainties and are starting to reprice risk premiums for short term events

US
With the exception of loans, US corporate credit (high yield and investment grade) declined in September. Widening spreads were partly a function of investor profit-taking (particularly in high yield) in advance of the election. High yield ETFs posted outflows while investment grade ETFs continued to see inflows, all during a period of heightened US issuance. Moreover, the passing of Supreme Court Justice, Ruth Bader Ginsburg, has redefined the Senate agenda and pushed the stimulus bill to the side. This likely means fiscal stimulus will not come before the election. Economic data was reasonable with good auto sales figures, housing starts, and improving retail statistics. Nevertheless, non-farm payrolls were weak and initial jobless claims were also disconcerting. Investors will focus on developments in Washington DC (election, Supreme Court, stimulus) and are largely expecting increased volatility in the short term.

Europe
European fixed income returns were mixed for the month, as government bonds rallied followed by positive investment grade returns, while high yield lagged. We saw the post-March rally stall in September as markets digested rising COVID-19 cases across multiple geographies and contemplated the likelihood that further shutdowns would extend the runway for a return to social and economic normality. Short-term uncertainty around US elections/stimulus and Brexit negotiations contributed to cautious investor sentiment. As the European Central Bank (ECB) revises their inflation targets, we are carefully watching the effect on real yields. September saw a slight rise in real yields, which we expect the ECB to consider, possibly responding with additional quantitative easing before year end. With forecasted missed inflation targets up until 2022, a revised slower recovery expected for 4Q, and relative strength in Euro currency, we believe the ECB will provide some form of further accommodation. While we see short term risks affecting current market sentiment, we believe the medium-term horizon looks brighter once the short-term uncertainties are removed.

EM
Emerging Market (EM) fixed income returns declined on the back of geopolitical uncertainties, although we continue to see constructive economic data including higher-than-expected Purchasing Managers’ Index (PMI) numbers from China, promising German retail sales, and US consumer confidence. However, the markets this September seemed mostly guided by doubts surrounding a US fiscal package and the US presidential election, as well as a lack of closure on the Brexit trade deal between the UK and the EU. This month tensions escalated between Azerbaijan and Armenia over disputed land. Looking ahead, we continue to closely track how the capital markets are digesting these various geopolitical uncertainties and are starting to reprice risk premiums for short term events. We believe this choppy environment may present attractive opportunities. We continue to watch the US Dollar and to monitor relations between the US and China and the upcoming US election in November.