Corporate Credit Snapshot – 29 February, 2020

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  • Risk-off sentiment related to the coronavirus led to a sharp bifurcation of global fixed income returns with high yield and loans declining and government bonds, US Treasuries in particular, rallying in a flight to quality
  • Risk assets began to turn lower once Italy, Iran and South Korea announced a series of coronavirus patients
  • We expect new US cases to increase as testing finally begins
  • As would be expected, energy declined given reduced global demand as did travel/tourism, lodging and transport and other cyclicals

US
Risk-off sentiment related to the coronavirus led to a sharp bifurcation of US fixed income returns with high yield and loans declining and US Treasuries rallying in a flight to quality. Investment grade corporates also rallied benefitting from the dramatic decline in Treasury yields to an all-time low by month-end as fears surrounding the spread of coronavirus increased. Risk assets began to turn lower once Italy, Iran and South Korea announced a series of coronavirus patients. While new confirmed cases have declined substantially in China thanks largely it seems to the drastic quarantining measures, new cases are increasing outside of China where governments are less able to implement such tough measures. We expect new US cases to increase as testing finally begins. As would be expected, energy declined given reduced global demand as did travel/tourism, lodging and transport. The new issue market was open to high quality high yield issuers but challenging for stressed companies. Given historically low US government yields, investment grade issuers were able to issue at record lows.

Europe
European fixed income returns were led by sovereigns following risk-off sentiment and flight to quality as a result of the continued spread of the coronavirus. The development and global spread of the coronavirus from China continued to raise risk aversion and has strongly accelerated the fall in government bond yields and a global selloff in risk assets. Italy has been most affected, with the number of cases requiring strict containment measures in the most economically-productive part of the country. With the situation expected to weaken the financial circumstances of Italian SMEs (small and medium enterprises) and more broadly to have a significant negative impact on 1Q20 GDP, the Italian government announced plans to immediately inject €3.6bn into the economy to support SMEs. In France there was a similar contraction of factory activity, where the manufacturing PMI also fell. The development of the coronavirus is the most important factor driving markets and economic outlook at present. The beginning of manufacturing recovery seen in the last few months and the resilience of the service sectors will be tested through the March data. We believe lower rates globally should provide some support to credit markets.

EM
Emerging Market (“EM”) fixed income returns were driven by the spread of the coronavirus and the global sell-off of risk assets more broadly. In this risk-off month, while the spreads between EM bonds and US Treasuries have grown, the fall in US yields has somewhat helped stabilise EM bond performance. In part, the markets benefitted from previous EM central bank rate cuts in Turkey, Egypt, South Africa, Malaysia, and Argentina. This month, Mexico’s central bank cut its growth forecast and fourth-quarter GDP estimate, after announcing the economy contracted 0.1 % in the last three months of 2019 (despite earlier expectations that growth had been zero). Within the corporate universe, duration-sensitive investment grade segments of the markets generated a modest positive performance. At the country level, Argentina continued negotiations with investors over its sovereign debt repayments as the country targets a deal by the end of March. Chinese PMI and trade figures are expected to come out the first week in March, offering a more comprehensive picture of the impact the virus outbreak has had on Asia’s largest economy.