Corporate Credit Snapshot – 31 December 2020

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  • Global market fixed income returns were mostly positive for the month, led by high yield (HY) bonds in the US, Europe, and Emerging Markets (EM)
  • US HY and loans moved higher at year end on the COVID-19 vaccine rollout, potential stimulus payments promised by the Federal government, and the certainty of a presidential transition to Biden in January following the dismissal of a number of court challenges to the election’s result. Europe saw a similar risk-on surge buoyed by the down-to-the-wire Brexit agreement, the final ratification of the European Recovery Fund, and the European Central Bank’s clear message that they will expand and extend the asset purchase programme and very low interest rates for a long time to come
  • New issuance in the US continued towards year-end, capping a record year for both HY and IG
  • In EM, positive technicals, including strong inflows, continue to be generated by the promise of more US Federal Reserve stimulus and supportive global central bank action on the near horizon

US
Despite a tumultuous first quarter and a resurgence of COVID-19 cases at year end, US credit posted strong returns for both the month of December and for the year 2020. December was a risk-on month, with high yield (HY) and loans outperforming both investment grade (IG) corporates and US Treasuries, the latter of which declined. US HY and loans moved higher at year end on the COVID-19 vaccine rollout, potential stimulus payments promised by the Federal government, and the certainty of a presidential transition to Biden in January following the dismissal of a number of court challenges to the election’s result. A world with stimulus and light at the end of the COVID-19 tunnel gave investors confidence to add credit to their portfolios despite rising COVID-19 cases and death counts. New issuance in the US continued towards year-end, capping a record year for both HY and IG. Issuers able to access the new issue market were able to secure important financing in the face of COVID-19 related economic challenges. Defaults are waning and we believe that we have seen the last of the precipitous default increases. We anticipate the trailing 12-month default rate will stay elevated in the 6-7% range into Q2 2021 (mostly concentrated in the energy sector) before falling quickly after May 2021, when 2020’s peak defaults “roll off” the back end of this calculation. Interestingly, investment grade spreads are very close to where they were one year ago while HY, particularly the BB/B segment of the market, is slightly wider than a year ago.

Europe
December fixed income returns were led by positive returns in high yield credit and followed by more modest positive returns from investment grade credit. Government bonds declined after the German bund experienced volatility caused in large part by Brexit discussions that continued until Christmas Eve. In our view, Brexit, along with cautious optimism despite continued COVID-19 vaccine challenges, moved the markets. While December started out positively for the UK, as it was the first to authorize a vaccine, there continue to be logistical challenges regarding deployment and public notification of a new, more contagious COVID strain. We believe Europe will most likely split into various stages over the next few months, as discrete mobility restrictions and vaccine allocation numbers start to impact individual nations. The European Central Bank sent a clear message that they will expand and extend the asset purchase programme and very low interest rates for a long time to come. This month we saw the final ratification of the European Recovery Fund, a positive resolution of the US fiscal stimulus issue, and lower than anticipated default rates in Europe, which additionally buoyed investor sentiment. December was a month where we saw some short-term uncertainties progressively removed, leaving what we see as a brighter roadmap for the New Year ahead.

EM
Emerging Market (EM) fixed income returns were positive this month driven by continued optimism concerning vaccine production and distribution, the determination of a US relief package, and a down-to-the-wire Brexit deal. Positive technicals, including strong inflows, continue to be generated by the promise of more US Federal Reserve stimulus and supportive global central bank action on the near horizon. US 10-year Treasury yields continued to trend higher and steeper (Source: GA10 – The ICE BofA ML Current 10-Year US Treasury Index, as of December 31, 2020). As the US Dollar continued to weaken (in part due to a positive market reaction to the Brexit agreement), investors in EM expect continued loose global monetary policy to support capital markets. We continue to see bullish growth outlooks for both commodities and energy, as balance sheets continue to be repaired, leading to outperformance by EM in December. Heading into 2021, we believe EM markets will be moved by a more predictable and bipartisan approach to US and China relations, which we continue to closely monitor.