Corporate Credit Snapshot – 31 July, 2020

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  • Global fixed income returns were positive for the month, as June’s themes carried over. High yield markets led the way because of their attractive yields and strong technical support which encouraged price appreciation
  • Against a backdrop of record new COVID-19 infections in the US, US high yield posted its best month since October 2011 as CCC rated credits experienced the most spread compression in any month ever
  • Market sentiment in July was largely driven by ongoing technical support offered to risk assets by central banks – the Federal Reserve (Fed) in the US and the European Central Bank (ECB) in Europe
  • Emerging Markets benefitted from the unprecedented increase in USD liquidity (driven by the Fed) and a weaker Dollar. EM markets continued to benefit from the coordinated efforts by various central banks to help reverse some COVID lockdown-related losses

US
Against a backdrop of record new COVID-19 infections in the US, US high yield posted its best month since October 2011 as CCC rated credits experienced the most spread compression in any month ever. Investment grade corporates and loans also generated strong performance, albeit lower than high yield. Given a strong July, the BB/B US high yield market is now positive for the year, while the broad market lags a bit and is flat. US high yield experienced record new issuance this month while US investment grade issuance was also positive but lower than in past months. Inflows for both high yield and investment grade were strong as investors still believe corporate credit offers value relative to the low absolute level of sovereign yields. The Federal Reserve continued its supportive measures as the economy was still crippled by COVID-19. Companies began reporting earnings, citing very challenging circumstances, although several companies provided cautious guidance that Q2 was the bottom with an improving outlook from Q3 forward.

Europe
European high yield markets led the way because of their attractive yields and strong technical support which encouraged price appreciation. Investment grade markets trailed closely behind, followed by government bonds. Market sentiment in July was largely driven by ongoing technical support offered to risk assets by the European Central Bank (ECB), the European Commission’s historic EU Recovery Fund agreement, and positive economic numbers following the gradual re-opening of Western European economies. Germany started its semester as president of the Council of the European Union in July, where the much-anticipated agreement on the proposed EU Recovery Fund took priority and was achieved with only modest deviation from the initially-proposed balance of grants and loans. The Recovery Fund is generally regarded as a milestone response to the challenges that have been presented by the COVID-19 related economic threat and indicates confidence in a more resilient Eurozone.

EM
Emerging Market (EM) fixed income returns were strongly positive for the month, driven by a weaker US Dollar and renewed investor appetite as demonstrated by larger inflows into the US credit markets. This month we saw credits with stronger correlation to commodity prices outperforming, as well as a strong demand for US Treasury linked assets (sending prices up and yields lower). We also saw continued positive effects in EM from the unprecedented increase in USD liquidity (driven by the Federal Reserve Fed). EM markets continued to benefit from the coordinated efforts by various central banks to help reverse some COVID-19 lockdown-related losses. Looking ahead we are closely watching the US Dollar and political uncertainties including tensions between the US and China and the upcoming US election in November.