Corporate Credit Snapshot – 31 July, 2018

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  • Risk was back in favor in July as evidenced by the strong performance of global high yield, loans, the BBB segment of the investment grade market and US equities.  Treasuries, Gilts and Bunds declined
  • In short, the greater the spread, the greater the outperformance this month
  • Within corporate credit, both developed market investment grade and high yield performance was driven by solid technicals, specifically a lack of supply
  • Emerging Market (EM) corporate debt had a more positive month in July, with investors taking advantage of wider spreads following the last few months’ weakness

US
Risk was back in favor in July as evidenced by the strong performance of US high yield, loans, the BBB segment of the investment grade market, and US equities.  Treasuries declined.  In short, the greater the spread, the greater the outperformance.  Within corporate credit, both investment grade and high yield performance was driven by solid technicals, specifically a lack of supply.  In the case of high yield, even modest outflows could not off-set the power of coupon reinvestment amidst little net new supply.  Why the lack of supply?  Companies have largely financed themselves in the last few years, locking in cheap financing and pushing the maturity wall out.  Further, recent, M&A activity has been muted, conjuring little need for new debt.  US corporate fundamentals remain solid as companies continue to report positive earnings, generally beating expectations.

Europe
In line with other regional markets, European corporates traded in positive territory during July, although underperformed the US market.  The European high yield segment of the market was the primary driver of returns, while investment grade bonds also put in a modestly positive performance.  As would be expected as we enter the summer lull, there was less activity in the primary market as issuance volumes fell.  The corporate earnings season kicked off, with a high percentage of companies reporting solid numbers in Europe.  A more constructive political backdrop also provided support for markets. Concerns for a global trade war moderated somewhat following easing trade tensions between the US and Europe after the two sides signed an agreement to work together to resolve recent issues.  Meanwhile the European Central Bank left rates on hold while reaffirming the end of quantitative easing was still scheduled for the end of 2018.  Concerns around the strength of the region’s economic recovery remained on the agenda, however, after GDP grew at its slowest rate since 2016, while inflation moved higher.

EM
Emerging market (EM) corporate debt had a positive month in July, with investors taking advantage of wider spreads following the last few months’ weakness.  Events that had been weighing on markets for some time (China, trade wars, political instability in Europe, etc.) appeared to ease, providing a further boost to risk assets.  Positive returns came from all sectors and the majority of countries, while at a ratings level, high yield outperformed investment grade.  Political events dominated in Latin America.  Fears that former Brazilian president Lula could be released ahead of the October elections were quashed after an appeal on his sentence was rejected.  While he remains the PT party’s candidate, he will be unable to participate in the elections.  In Mexico, the country’s presidential elections resulted in the much – expected victory of Andrés Manuel López Obrador (AMLO).  Despite fears his election would be a negative for the country and could lead to a return to less orthodox policies, for now investors appear to be keeping an open mind; his inauguration is not due until December.  In Turkey, the challenging macroeconomic and political backdrop continued as the central bank decided to keep interest rates on hold amid increasing scepticism of the bank’s ability to be independent following the recent re-election of President Erdogan his potential influence on bank policy—a charge strongly denied by the central bank’s governor, despite Turkey’s month-end inflation uptick.