Corporate Credit Snapshot – 31 May 2021

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  • Global fixed income was generally positive except for European investment grade and sovereigns. Treasuries benefitted from Federal Reserve statements aimed at soothing investor worries about inflation
  • Loans outperformed due to strong technical demand for the asset class from retail investors fearful of the potential for higher rates and CLOs
  • Eurozone inflation rose to 2% in May, the first time the rate has gone above the European Central Bank’s (ECB) target in over two years
  • Central banks worldwide continued their reflationary policies, contributing to another strong month for commodities

US
US credit was positive for the month led by longer duration on the back of a modest rally in US Treasuries. Treasuries benefitted from Federal Reserve statements aimed at soothing investor worries about inflation. In this environment, high yield generated coupon minus returns and loans outperformed due to strong technical demand for the asset class from retail investors fearful of the potential for higher rates and CLOs. High yield issuance continued elevated, delivering the highest issuance for any May on record. Although the use of proceeds remains majority refinancing, we are seeing new issuers come to the market and we are beginning to see more shareholder-friendly actions like M&A, stock buy backs, and dividends. There were no defaults this month and Q1 earnings announcements ended up beating expectations. We believe corporate fundamentals will remain strong as economies re-open and consumers with pent-up demand start spending again. We believe there should be a very benign default outlook going forward.

Europe
May was a positive month for European high yield credit markets, however investment grade lagged as European rates underperformed due to inflation concerns amidst an improving economic outlook. Eurozone inflation rose to 2% in May, the first time the rate has gone above the European Central Bank’s (ECB) target in over two years. In our view, the ECB will take stock of such increased inflation but will maintain an accommodative monetary policy well into the recovery phase. By the end of the year, we expect to have a clearer view on whether this inflation is transitory or more structural. With countries across the eurozone seeing successful vaccinations bolstering economic recovery, a rebound seems clear, although labour shortages could prove a slight roadblock.

EM
Emerging Market (EM) fixed income returns were positive in May driven by the stability of US rates and encouraging global COVID-19 data. US Treasuries benefitted from Federal Reserve statements aimed at soothing investor inflation worries. Central banks worldwide continued their reflationary policies, contributing to another strong month for commodities. While there was significant unrest in certain EM regions (i.e., Colombia, Peru, and Israel), the month ended slightly more peacefully. India, which has been the epicenter of COVID-19 cases most recently, seems to have seen the peak of its second wave. Positive global momentum for vaccine programs continues to support investor enthusiasm.