Corporate Credit Snapshot – 31 January, 2019

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  • Global risk assets staged a dramatic recovery in January with high yield outperforming within corporate credit
  • High yield benefitted from more positive technicals this month as strong inflows chased limited supply
  • The Federal Reserve (Fed) did not raise rates at its January meeting and announced that it would be “patient” in raising short term rates going forward, favoring a wait and see approach regarding economic data.  Importantly, the Fed noted that it would be open to adjusting Fed balance sheet normalization based on economic data
  • While it was a positive return month for global markets, several key issues remain unresolved – the US government shutdown (we are only in a 3 week reprieve), US/China trade, and BREXIT

US
Risk assets staged a dramatic recovery in January with high yield outperforming within corporate credit.  Investment grade credit, loans and Treasuries were also positive for the month, but underperformed high yield.  High yield certainly benefitted from more positive technicals this month as strong inflows chased limited supply.  The Federal Reserve (Fed) did not raise rates at its January meeting and announced that it would be “patient” in raising short term rates going forward, favoring a wait and see approach regarding economic data.  Importantly, the Fed noted that it would be open to adjusting Fed balance sheet normalization based on economic data.  Balance sheet normalization, or quantitative tightening, is the Fed’s attempt to reduce its significant holdings of Treasuries and mortgage-backed securities that were purchased after the financial crisis in the hopes of reducing long-term interest rates.  While it was a positive month for global markets, several key issues remain unresolved – the US government shutdown (we are only in a 3 week reprieve), US/China trade, and BREXIT.  We are carefully following these issues.

Europe
After a difficult final quarter of 2018, European credit markets experienced a significant rebound in January as investors took comfort in the lowering of perceived risk, including positive signs in the US/China trade war, and more dovish language from global central banks in response to indications of a broader slowdown in global growth.  From a macro perspective, fears surrounding the health of the Eurozone economy continued—the overall bloc grew only 0.2% between the third and fourth quarters of the year and Italy entered a technical recession.  However, the European Central Bank responded by changing its language to acknowledge the increasing headwinds as well as indicating it still had tools available to stimulate growth if needed.  Within European credit, both segments of the asset class produced positive returns in January, although high yield outperformed investment grade.  The technical backdrop appeared supportive.  Investment grade showed strong new issuance which was generally well received by the market as it offered good concessions to the secondary markets.  For high yield, the new issue market continued to be more muted, with mostly stronger credits coming to markets to refinance.

EM
Emerging market (EM) corporates had a solid start to the year as markets rallied on the back of a number of positive catalysts.  The US Federal Reserve eased pressure on markets amid concerns of further rate hikes, keeping rates unchanged at their first meeting of the year and introducing more neutral forward guidance.  The Organisation of Petroleum Exporting Countries (OPEC) efforts to stabilise oil prices appeared to come into effect as cuts drove oil prices higher.  Meanwhile, despite some concerns earlier in the month, the US/China trade negotiations also appeared to be improving, with some positive soundbites from a meeting between President Trump and Chinese officials at month end.  With the broader investment community underweight risk and with excess cash, this offered a good combination for a market rally. Idiosyncratic stories also drove the positive momentum within EM countries such as Argentina, Brazil, South Africa, Turkey and Indonesia.  By rating, high yield bonds outperformed investment grade.