Corporate Credit Snapshot – 30 June, 2020

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  • It was another strong month for global credit led by emerging market (EM) high yield and followed by US investment grade and developed market (DM) loans and high yield
  • DM investment grade performance was led by longer duration US BBBs which rallied when the Federal Reserve (Fed) announced that in addition to its purchases of investment grade ETFs, it would also start buying single name investment grade bonds mid-month
  •  European market sentiment in June was largely driven by continued unprecedented technical support offered to risk assets by the European Central Bank (ECB), (including a decision to increase the PEPP—Pandemic Emergency Purchase Programme—by EUR 600 Bn), combined with positive economic numbers following the re-opening of Western European economies
  • Credit and equity markets have been largely sustained by strong technicals and highly accommodative central bank action

US
It was another strong month for US credit led by investment grade, followed by loans and high yield. Investment grade performance was led by longer duration BBBs which rallied when the Federal Reserve (Fed) announced that in addition to its purchases of investment grade ETFs, it would also start buying single name investment grade bonds mid-month. Improvement in the economic data and equity market froth further catalyzed strong performance. While performance was positive for the month, high yield peaked earlier in June and then started to decline as inflows turned to outflows by month-end. Both high yield and investment grade have experienced record issuance as companies built their war chests in preparation for a potential prolonged economic slowdown. Corporate fundamentals are weakening and investors are eagerly looking for a vaccine to unleash economic activity in key sectors. Credit and equity markets have been largely sustained by strong technicals and highly accommodative central bank action. Companies, including COVID-19 sensitive companies (travel, gaming, transport) have been supported by Fed action that has opened the credit market to issuers, especially those with collateral. We believe we will see an increase in defaults going forward. The question is, can stressed companies issue debt to survive longer term?

Europe
European fixed income returns were strongly positive for the month. High yield markets led the way with robust performance as a result of substantial carry and supportive equity markets. Investment grade markets followed, with government bonds as the laggards. Market sentiment in June was largely driven by continued unprecedented technical support offered to risk assets by the European Central Bank (ECB), (including a decision to increase the PEPP—Pandemic Emergency Purchase Programme—by EUR 600 Bn), combined with positive economic numbers following the re-opening of Western European economies. European fundamentals may further improve if the European Recovery and Resilience Fund negotiations succeed at the summit later in July. The current plans propose an increased EU budget for the 2021-2027 period and the implementation of a recovery fund of up to EUR 750 Bn (split between grants and loans). Although these negotiations are expected to be difficult, there is a chance that a decision may be reached at this meeting, as both German and French leaders remain committed to the EU proposition. Germany will take the leadership of the rotation presidency of the EU starting in July. We continue to expect that bond prices will remain supported by ECB demand as well as slowing new issuance during summer time.

EM
Emerging Market (EM) fixed income returns were strongly positive for the month, as coordinated ef-forts by central banks to loosen monetary policy continued to help reverse some of the losses sus-tained during the global sell-off in March and the economic effects of subsequent lockdowns. EM credits robustly outperformed as a risk asset class for the second month in a row. We believe part of this outperformance can be attributed to supply—EM is printing new transactions at a slightly lower run rate than in 2019, in comparison with the Western markets which have recently broken record af-ter record for new issuance. At the close of the month, we saw riskier assets priced higher, govern-ment bonds with steeper curves, and a weaker US dollar. Although COVID-19 cases continue to domi-nate the news cycle, economic data has positively followed the loosening global lockdowns.