Corporate Credit Snapshot – 31 March, 2018

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  • Risk-off sentiment, driven by macro concerns, dominated and adversely impacted global equities, and to a significantly lesser degree, global high yield
  • High quality government bonds like Treasuries, Gilts and Bunds benefitted from a flight to quality leading to their outperformance
  • Despite solid economic data, risk assets declined on the back of the prospect of less accommodative Federal Reserve (Fed) policy and the prospect of a US-China trade war
  • We have seen a dramatic uptick in global loan repricings suggesting that demand for the asset class is strong and investors are comfortable with loan-issuer fundamentals

US
Risk-off sentiment, driven by macro concerns, dominated and adversely impacted equities and, to a significantly lesser degree, high yield.  Treasuries benefitted from a flight to quality leading to their outperformance.  Fixed income returns were mixed with longer duration instruments like Treasuries and investment grade corporates generating a positive return and outperforming high yield.  Loans generated a positive return on the back of continued strong technical support and reasonable credit fundamentals.  Despite solid economic data, risk assets declined on the back of the prospect of less accommodative Federal Reserve (Fed) policy and the prospect of a US-China trade war.  The technology sector came under pressure due to privacy concerns at Facebook and President Trump’s tweets targeting Jeff Bezos and Amazon.  Within credit, fundamentals remain strong.  Defaults have been modest, with company defaults being well-telegraphed one-off situations.  We believe the loan market provides a telling indication of the health of the credit markets.  Loan re-pricings allow borrowers to come back to the loan market and negotiate better rates.  We have seen a dramatic uptick in these loan repricings suggesting that demand for the asset class is strong and investors are comfortable with loan-issuer fundamentals.  We have also seen an increase in CLO issuance, further supporting the technical picture as CLOs are large buyers of loans.

Europe
While European credit markets had a better month in March than February, they still declined over the month, ending a quarter that has seen volatility return to markets. European credit, however, outperformed US credit over the month and quarter as the US Federal Reserve (Fed) embarked upon a more aggressive rate hiking path. In March the European Central Bank continued to advocate a more dovish stance towards monetary policy normalization, highlighting its commitment to keeping rates on hold until the end of the year. As a result, European investment grade found support from rate stability and the ongoing corporate sector purchase program. However, high yield performed less well, impacted by rising volatility as a result of newly-announced US trade tariffs on metals, which created global trade war concerns. The Italian election dominated news flow early in the month as two non-mainstream parties received the greatest proportion of the vote, although the parties have yet to form a government and the impact on credit markets was relatively limited. Meanwhile the European technology sector felt the impact of worries of more intense regulatory scrutiny emanating from the US after a number of idiosyncratic events combined to weigh on the sector globally.

EM
Emerging market (EM) corporates experienced more sideways month in performance during the month as President Trump announced further trade tariffs, this time targeting China and intellectual property rights. The uncertainty of retaliation, combined with early signs of a peak in economic activity, albeit from unsustainably high levels, pushed both equity and commodity prices lower. The exception being oil as tension with Iran rose following the US appointment of John Bolton as national security advisor. Credit spreads continued to widen slowly in sympathy with the uncertain environment. Although returns for the month were generally flat, performance differentiation by region continued. Asia underperformed, driven by trade tensions and heavy supply, while Latin America outperformed as numerous bond tenders, driven by deleveraging, supported the region. By rating, investment grade credits underperformed high yield. Sector performance was mixed with better returns coming from areas such as infrastructure and technology, media and telecoms while consumer and pulp and paper credits were weaker. While the trade war between the US and China escalated, geopolitical tensions eased surrounding North Korea after it announced plans for summits with both the US and South Korea, following a meeting between the secretive state and neighboring China. In Russia, Vladimir Putin was re-elected as President for a fourth term in office. Russia’s central bank meanwhile cut rates 25bps on the belief that inflation remains contained. Brazil’s central bank also cut the benchmark Selic rate to a record low of 6.5%, and eased reserve requirements for the banking sector, with both measures aimed at stimulating economic growth.