Corporate Credit Snapshot - September 2024

September 9, 2024

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US

In the US, risk assets delivered positive returns across the board in August, once again driven by a strong rally in rates.  Shorter rates outperformed, leading rate curves to bull-steepen, with US data generally supportive of the Fed starting to cut rates in September.  Investment grade benefited from falling US government yields, while high yield benefited from seasonal low supply, inflows, and positive sentiment following the strong indication given by Chairman Powell at the annual Jackson Hole conference that rate cuts would be forthcoming at the FOMC (Federal Open Market Committee) meeting in September. The Fed’s preferred inflation gauge, the PCE (Personal Consumption Expenditure) price index for July came in below target, with both headline and core inflation holding steady.

EUROPE

In Europe, credit markets generated positive returns across the board in August.  Rate moves were more muted than in the US; the 10-year Bund yield was flat on the month, and the 2-year Bund yield was approximately 14 basis points (bps) lower.   BBB and single-A rated credit performed similarly in both Europe and the US, with spreads about 5bps wider in Europe and mostly unchanged in the US.  In Europe, high yield outperformed investment grade due to higher yields and modest spread compression. While primary markets were relatively quiet through the first half of the month, they re-opened for European investment grade issuers in the second half of the month. This European supply drove some of the weaker relative spread performance for the month in Europe. 

EM

Emerging Market (EM) debt—especially hard currency debt—generated positive returns this month in line with rising US credit markets amidst growing clarity around a September US rate cut.  The EM sovereign universe notably benefited from gains on long-dated securities in countries like Abu Dhabi, Peru, and Indonesia.  EM investment grade outperformed its peer group in both the US and Europe, with Latin America as the strongest region in both investment grade and high yield. EM high yield performed in line with US high yield, demonstrating—in our view—that the rally in high yield credit markets was systematic “risk on”.  Asia underperformed this month as the property sector continues to drag on Chinese growth prospects.  By rating, the BBB rated bucket outperformed, benefiting from both government yields falling and spreads tightening.

OUTLOOK

Following the Jackson Hole conference in late August, investor focus seems to be concentrated on the US Fed’s moves in the month ahead.  We believe it is likely that we will see a shift in the Fed’s priorities from keeping prices stable to promoting maximum employment.  Additionally, investors are focused on the possibility of a “super-sized” 50bps rate cut in September, with the overnight interest rate swap market indicating a healthy chance of such a move. Although the Fed has telegraphed a 25bps cut, a weaker nonfarm payroll report earlier in September could prompt investors to price in a 50bps cut when the FOMC meets later in the month.  Whatever the Fed ultimately decides, the market reaction will no doubt tell us much about investor sentiment.

 

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 August 2024 and may change without notice.

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