Snapshot | November 7, 2023
Corporate Credit Snapshot
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- US credit delivered negative returns in October driven largely by continued domestic economic strength. This caused investors to reassess their view on rates; the market reaction was mostly bearish, with investors having concluded that the above trend growth and tight labor market could interrupt the disinflation trend and force the FOMC (Federal Open Market Committee) to tighten monetary policy further
- European credit markets generated mixed returns with only investment grade credit generating positive returns in October
- Emerging Market (EM) debt delivered negative returns this month on the back of geopolitical uncertainty and the recent jump in US yields.
- A number of central banks began cutting rates this month; Hungary’s central bank cut rates in-line with expectations, while Chile’s central bank delivered a more cautious rate cut than expected as challenging global financial conditions outweighed the fall in inflation
US credit delivered negative returns in October driven largely by continued domestic economic strength. US economic data continues to demonstrate vigor, particularly for the consumer. This caused investors to reassess their view on rates; the market reaction was mostly bearish, with investors having concluded that the above trend growth and tight labor market could interrupt the disinflation trend and force the FOMC (Federal Open Market Committee) to tighten monetary policy further. Economic reports continued to show limited evidence of any imminent downturn in the economy, with 3Q GDP surpassing expectations, while new and pending home sales also exceeded expectations (despite high mortgage rates). Consumer spending remained robust throughout the month and core inflation indicators moved modestly lower. The net result was a dramatic increase in Treasury rates at the long end (a bear steepener), which weighed on fixed income returns.
European credit markets generated mixed returns with only investment grade credit generating positive returns in October. Rates rallied at the start of the month following the Hamas attacks on Israel. As the month progressed—and the conflict seemed to remain relatively regionally contained—rates sold off, only to tighten again at the end of the month in response to a more dovish tone from the ECB (European Central Bank) and continued weak economic data. As a result, rates finished the month broadly lower. The ECB’s messaging didn’t change materially from the September meeting; however, the tone was considered more cautious. The “higher-for-longer” narrative persisted, this time accompanied by greater concern over the economic outlook; consequently, the market began pulling forward rate cut expectations again. This was further supported by (i) the weak GDP print from Germany; (ii) the ECB’s Bank Lending Survey which showed a continued contraction in the availability of credit and as well as demand from borrowers; and (iii) the rapid decline in Eurozone inflation that we saw at the end of the month. Primary markets were notably quiet with very little deal-flow across the board, providing a positive technical which supported spreads despite the negative news cycle.
Emerging Market debt delivered negative returns this month on the back of geopolitical uncertainty and the recent jump in US yields. A number of central banks began cutting rates this month; Hungary’s central bank cut rates in-line with expectations, while Chile’s central bank delivered a more cautious rate cut than expected as challenging global financial conditions outweighed the fall in inflation. Israel’s central bank remained on hold (in-line with expectations), while at the same time forecasters began pulling forward expected easing to Q1 2024, assuming softer growth and easing in financial conditions. In Asia, China continued to benefit from signs of a regional tech industry recovery as well as additional financial easing. In Japan, the BoJ (Bank of Japan) added some flexibility to its yield curve control policy, and the government announced a stimulus package to support low-income households and help raise its current low approval rating caused by the rising cost of living.
Looking ahead to the upcoming FOMC rate decision, consensus is that change is unlikely in early November. The market is anticipating no further increases and less than three cuts in 2024. Away from the Fed, the market will also absorb a plethora of additional datapoints, including home prices, vehicle sales, consumer confidence, ISM data, durable goods orders, and jobs/employment reports. We will also move to the heart of earnings season and continue to contend with uncertainty surrounding global conflicts and a potential US government shutdown on November 17th. While global markets are likely to remain choppy, we maintain our belief in the value of higher quality, lower volatility strategies where returns are driven by coupon income. Yields remain historically high—with high yield spreads at or above long-term averages—offering a potential cushion should rates move higher or spreads widen. Yields have rarely been this high during periods of economic growth, which we believe is a compelling position for credit.
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