Corporate Credit Snapshot – 30 April, 2018

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  • Although themes dominating markets for much of the year continued into April – rates pressures, inflationary concerns and trade tensions – we witnessed somewhat of a recovery in assets
  • A string of positive economic data and company earnings as well as increasing inflation pressures led to a sell-off in Treasuries (price moves inversely to yield). The US 10 year briefly traded above 3+% near month-end, a yield last seen on a sustained basis in 2011
  • Emerging market returns in April were largely driven by a weakness in Russia following the impact of US sanctions as well as the effect of higher US Treasury yields after the 10-year breached 3%
  • The ECB’s bond buying program continued and the bank emphasised its asset purchase programme could go beyond September if needed

US
It was a tale of two months in April as fixed income markets rallied in the first half of the month and declined in the second half of the month. By month-end, high yield and loans still managed to post a positive, coupon-like return, while investment grade corporates and Treasuries ended April negative. A string of positive economic data and company earnings as well as increasing inflation pressures led to a sell-off in Treasuries (price moves inversely to yield). The US 10 year briefly traded above 3+% near month-end, a yield last seen on a sustained basis in 2011. Given a benign default outlook, strong economic data, a new issue market dominated by refinancings, and CCC outstandings at cycle lows, we consider credit fundamentals to be solid. Nevertheless, we remain vigilant in our credit underwriting and believe that investors benefit from active management as we enter the later stages of the economic cycle.

Europe
Although themes dominating markets for much of the year continued into April – rates pressures, inflationary concerns and trade tensions – we witnessed somewhat of a recovery in risk assets. The monthly performance of European investment grade and high yield returned to positive territory, although high yield outperformed due to ongoing rates pressures in the investment grade space, especially after the benchmark US 10 Year Treasury yield reached 3%. We also saw a recovery in global equity markets, lifted by strong US corporate earnings which is supporting share buybacks and dividends as companies benefit from the US tax reforms and strong US economic backdrop. However, in Europe economic growth appeared to lose some momentum with a number of data releases – including from Germany and France – pointing to a slowdown. Nevertheless, European credit markets continued to feel supported by the accommodative European Central Bank (ECB) which kept interest rates on hold. In addition, Draghi was keen to emphasise the central bank’s focus that it would review economic data with “caution,” as well as his recognition that the pace of economic growth and recovery had moderated somewhat from last year. The ECB’s bond buying programme continued and the bank emphasised its asset purchase programme could go beyond September if needed.

EM
Emerging market returns in April were largely driven by a weakness in Russia following the impact of US sanctions as well as the effect of higher US Treasury yields after the benchmark 10-year breached 3% for the first time since 2013. High yield outperformed investment grade due to the latter’s greater rates sensitivity. At the regional level, European and CEEMEA markets were weak, while somewhat stronger returns came from Africa, Latin America and the Middle East. US foreign policy moved up a gear in April as the country imposed sanctions on a number of Russian companies early in the month due to the ongoing saga surrounding allegations of Russian interference in the US presidential elections. As a result, the metals and mining sector produced the weakest returns as aluminium producer Rusal was one of the companies targeted by the sanctions despite no wrongdoing by the firm. Better sector performances came from technology, media, and telecom, as well as financials. In other country news, Mexico’s presidential election campaign got into full swing, with the growing possibility of the election of a left-wing president in the form of Andrés Manuel López Obrador, and markets fearing it could result in a setback of key economic reforms. More positive political noise came from South Africa where newly-elected President Ramaphosa continued to focus on tackling corruption following a decade of Zuma rule. In other positive news, Indonesia was upgraded to baa2 by Moody’s as a reflection of the country’s ongoing improving economic fundamentals.