Snapshot | February 8, 2024
Corporate Credit Snapshot
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- Global credit delivered mostly positive returns with US and European loans and European high yield leading the way
- The end of the month brought a significant amount of heartening data, all of which may move the debate in the US from soft-landing to no-landing. There were no surprises from the FOMC (Federal Open Market Committee), which left policy rates unchanged
- In Europe, credit spreads tightened throughout the month despite the moves in interest rates, as continued inflows exceeded primary supply, ensuring a positive “technical” across both investment grade (IG) and high yield (HY)
- While a steady pace of easing across EM is more broadly favored by policy makers, strong progress on the inflation front seems to be prompting some countries to accelerate their pace of rate cuts
After a very strong two months, US fixed income credit paused, just managing to eke out a positive gain in January. The end of the month brought a significant amount of heartening data, all of which may move the debate in the US from soft-landing to no-landing. There were no surprises from the Federal Open Market Committee (FOMC), which left policy rates unchanged. Chairman Powell pushed back on the possibility of a March cut, but the Committee removed the policy tightening bias from its monthly statement. Economic data releases painted a continued picture of strength: consumer confidence hit a 2-year high, the manufacturing PMI significantly beat expectations driven by a large rise in new orders, the JOLT (Job Openings and Labor Turnover Survey) report showed openings unexpectedly rising, and—likely more concerning for the FOMC—there was an uptick in average hourly earnings.
In Europe, credit markets gained in January from excess returns, while the rates market produced negative performance as rates rose for much of the month before turning lower at month-end. At the January European Central Bank (ECB) meeting, Christine Lagarde confirmed the ongoing data-dependent approach, but did not push back as firmly as expected against suggestions that the central bank would cut rates in the near term. This softer stance caused interest rates to turn lower later in the month, particularly as other prominent ECB members struck a more dovish tone. Market concerns about US regional banks also returned late in the month, helping rates move lower. Credit spreads tightened throughout the month despite the moves in interest rates, as continued inflows exceeded primary supply, ensuring a positive “technical” across both investment grade (IG) and high yield (HY). The recent theme of “compression” within the asset class continued, with BBBs outperforming single As and HY outperforming IG. Higher beta segments of the market—including subordinated financials and corporate hybrids—performed well, as investors looked to deploy cash into higher yielding opportunities. Meanwhile, longer duration credit underperformed because of the rates move.
Emerging Market (EM) debt delivered mixed returns in January, with high yield generating positive returns and investment grade delivering modestly negative performance. China announced more stimulus to counter deflation and to kick-start the economy, and the People’s Bank of China (PBoC) made a large cut to its Reserve Requirement Ratio (RRR) to free up bank reserves for additional lending. This followed from reports that the authorities were considering additional fiscal stimulus through the issuance of a 1tn yuan special bond and a 2tn yuan package to support the stock market. Also in Asia, South Korean semiconductor companies reported positive operating performance in Q4 2023 for the first time in more than a year on the back of growth in AI related chips and a general price recovery that gained momentum in the second half of 2023. In EM, rate-cutting cycles remain underway amid easing inflation and supportive global financial conditions. While a steady pace of easing is more broadly favored by policy makers, strong progress on the inflation front seems to be prompting some countries to accelerate the cycle. At the end of the month, we saw Colombia and Hungary’s central banks start easing, with a pick-up in pace expected. Brazil’s central bank maintained its assumed pace of cuts, while Chile’s central bank accelerated. Looking ahead, markets continue to price significantly more rate cuts even as continued growth resilience and stickier core disinflation make a case for deeper cuts that much harder.
January saw various central banks approach the beginning of rate cutting as inflation data broadly continued to trend lower despite continued strong economic and jobs data in the US. While we expect some rate volatility to continue, an abatement of the duration headwinds investors faced over the last two years seems imminent and may even provide a tailwind to fixed income returns. While economic growth is slowing—particularly in Europe—we believe corporate balance sheets are well positioned across global credit. As we have been saying, corporate credit balance sheets entered this cycle in good fundamental shape with low leverage and high coverage, and with a relatively benign maturity profile. Default activity has largely remained concentrated in certain sectors (e.g., healthcare, tech) where leverage was high, and in others (e.g., telecom) with secular concerns. Large sectors in credit, such as energy, continue to perform well. While maturities do begin to pick up in 2025 in the US—and are more significant in 2024 for Europe—financing markets remain open to good credits.
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