Corporate Credit Snapshot – 31 December 2021

Please click here to download the full report.

  • Despite the global spread of the COVID-19 Omicron variant, it was a risk-on month
  • The Federal Reserve (Fed)’s acknowledgement that inflation is broad based and likely not transitory contributed to a sell-off in Treasuries
  • European credit markets managed to shrug off concerns surrounding the Omicron variant in December, with spreads in both IG and HY tightening after reports that the new variant appeared less lethal than its predecessors
  • Emerging Markets (EM) generated positive returns this month (both HY and IG), despite continued uncertainties imposed by the Omicron variant

US
Despite the global spread of the COVID-19 Omicron variant, it was a risk-on December. Equities, high yield (HY), and oil all posted strong gains this month. Within fixed income, HY and loans generated strong positive returns while Treasuries and investment grade (IG) corporates declined. The month started off weaker in HY with new issues weighing on the market. After new issuance stopped in advance of the typical holiday slow down, and after early data from South Africa indicated that while the Omicron variant was more contagious—but less lethal—than previous variants, investor fear subsided and spreads tightened meaningfully. The Federal Reserve (Fed)’s acknowledgement that inflation is broad based and likely not transitory contributed to a sell-off in Treasuries. We saw significant IG issuance with companies pulling forward their financing plans given potential rate hikes in 2022. We expect pressure on interest rates based on the Fed’s hiking cycle and planned tapering will affect the shape of the US Treasury curve—the more hikes, the flatter the curve.

Europe:
European credit markets managed to shrug off concerns surrounding the COVID-19 Omicron variant in December, with spreads in both investment grade and high yield tightening after reports that the new variant appeared less lethal than its predecessors. In our view, tighter spreads seem justified, as companies are now sitting on cash. We believe that yields are supportive for credit investing. With the predictable seasonal slowdown in December, investors shored up their cash reserves to weather the year’s last few weeks of lower liquidity, leaving them in a position to deploy capital quickly as new opportunities arise. The macroeconomic backdrop continued to present a mixed picture. Inflation remained elevated prompting the European Central Bank (ECB) to announce it was cutting back its pandemic emergency purchase program which will end in March. However, the ECB is committed to maintaining its broader asset purchase program, while leaving interest rates unchanged over the medium term.

EM
Emerging Markets (EM) generated positive returns this month despite continued uncertainties imposed by the COVID-19 Omicron variant. Both high yield and investment grade corporates posted gains in December, driven by investor sentiment which improved as fears related to possible lockdowns subsided and the variant was widely reported to be less lethal than those that preceded. In Latin America, Brazil successfully auctioned various deep sea oil prospects in a watershed moment for the government’s program of infrastructure and natural resource concessions. Turkish inflation soared to the highest level in almost two decades as President Erdogan’s economic management continued to spark a surge in consumer prices. One of the greatest wild cards for EM in 2022 is how long China will keep its “zero-COVID” policy since stringent controls in China are influencing global markets. Following China’s sharp slowdown last year, there is some hope that China’s stance may ease following the February Olympics, which could boost consumption and help stabilize the economy. However, it is also possible that strict lockdowns and closed borders will remain until the end of 2022, which in turn might prolong supply bottlenecks and keep global inflation elevated.