Corporate Credit Snapshot – 28 February, 2018

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  • Global fixed income and equity markets were broadly lower in February as volatility returned on the back of fears of higher rates going forward.  Global loans were slightly positive
  • The month started with solid US employment and inflation figures.  Many investors viewed this positive economic data as an indication that the Federal Reserve would move aggressively in their rate hikes
  • Volatility spiked and was exacerbated by the unwinding of short VIX positions – most notably the Credit Suisse ETF
  • Despite all this, global corporate credit fundamentals remain strong and the default outlook benign as evidenced by the relatively tight trading range of corporate credit spreads

US
US fixed income and equity markets were broadly lower in February as volatility returned on the back of fears of higher rates going forward.  Loans, by contrast, were slightly positive given their floating rate nature while duration sensitive investment grade corporates and Treasuries experienced the most pronounced declines.  The month started with solid employment and inflation figures.  Many investors viewed this positive economic data as an indication that the Federal Reserve (“Fed”) would move more aggressively in their rate hikes.  Treasuries declined (rates higher) as did equities and fixed income.  Volatility spiked and was exacerbated by the unwinding of short VIX positions – most notably the Credit Suisse ETF.  Investors have a lot to watch going forward – rates, global central banks and Washington political developments.  Despite all this, corporate credit fundamentals remain strong and the default outlook benign as evidenced by the relatively tight trading range of corporate credit spreads.  The new issue market provides another indication of the health of the corporate credit markets.  New issuance has been limited and we have seen very little CCC rated issuance suggesting companies are prudently managing their leverage.

Europe
European credit markets behaved in a similar fashion to their global counterparts in early February with heightened levels of volatility brought on by fears of increased inflationary pressures in the US, leading to a greater-than-expected number of rate rises. This in turn put pressure on Treasuries and equity markets. However, while inflationary pressures appeared to cause concern in the US, in Europe they were less of an issue with headline inflation falling to its lowest level in a year. This in itself proved somewhat problematic as Eurozone inflation moved further away from the European Central Bank’s (“ECB”) target of just under 2%. Other data releases also somewhat disappointed with less upbeat PMI numbers in France and Germany and weaker consumer confidence in the Eurozone.  Meanwhile market participants continued to focus on the ECB’s rhetoric for signs of when it will end its quantitative easing program.  Draghi remained cautious on his messaging and markets are now pricing in a greater likelihood of action at the March meeting.

EM
Emerging market (“EM”) corporates had a more volatile month in February. Late January’s broader global market volatility, instigated by concerns of higher inflationary pressures and thus the potential for more rate rises in the US, spilled into February. US rates continued to move higher, weighing on EM assets. Consequently, while both segments of the EM corporate universe produced negative returns, high yield corporates continued to outperform their investment grade counterparts. By region, Europe was among the best performers while Middle Eastern and Latin American corporates were weaker. Brazil suffered a further sovereign ratings downgrade (this time by Fitch) following last month’s S&P action.  Elsewhere in the region, Venezuela’s debt-stricken country launched the pre-sale of the petro – a crypto currency backed by the state’s oil reserves – the latest solution to deal with the country’s funding needs. South Africa’s political situation continued to dominate news flow after President Zuma resigned, replaced by the recently-elected head of the ANC, Ramaphosa. This move towards a more market-friendly regime lifted investor hopes for positive reforms in the country; Ramaphosa was quick to remove his predecessor’s supporters and replace them with allies who had previously stood up to Zuma’s corrupt regime.