Snapshot  |  September 8, 2023

Corporate Credit Snapshot

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  • Global credit delivered mostly positive returns
  • US credit delivered mixed returns on the back of higher rates.  At month-end, in line with the market, we are no longer anticipating any further hikes from the Fed this cycle unless economic expansion accelerates 
  • European credit markets generated mostly positive returns.  There was some volatility during the month as investors contended with lower PMI data (which could support a pause in rate hikes in September), but also persistently sticky inflation.  At month-end, we do not expect the European Central Bank to hike in September, with later meetings remaining data-dependent
  • Emerging Markets delivered negative returns this month.  While recent developments in China have increased concerns around potential spillover from housing weakness to shadow banking and local government funding stress, August PMIs and policy moves were modestly constructive.  Perhaps even more significantly, the momentum of policy support seems to be accelerating—specifically regarding the housing sector 

US

US credit delivered mixed returns, with high yield generating positive performance and investment grade and Treasurys declining on the back of higher rates.  Economic data released in August provided something for everyone—depending on your view of the economy.  Manufacturing and capital investment continued to contract, while unemployment remained low, and services continued to march forward on expansionary trends.  CPI and PPI trends came in around expected levels.  The housing sector remained resilient—despite the highest mortgage rates since 2000—mostly due to limited inventory as homeowners are locked into their existing properties with lower mortgage rates (Reuters, 23rd August 2023). We believe the trends for the month illustrate an economy that is slowing overall but not contracting, pushing recession talk into 2024 at the earliest. At the annual Jackson Hole meeting, Federal Reserve (Fed) Chairman Jerome Powell gave a neutral-to-somewhat hawkish speech; he stuck to the script of focusing on getting inflation back to 2% through a “higher for longer” policy.  At month-end, in line with the market, we are no longer anticipating any further hikes from the Fed this cycle unless economic expansion accelerates.

EUROPE

European credit markets generated mostly positive returns, with high yield (HY) and investment grade (IG) posting positive performance and government bonds delivering mixed returns.  There was some volatility during the month as investors contended with lower PMI data (which could support a pause in rate hikes in September), but also persistently sticky inflation. At month-end, we do not expect the European Central Bank to hike in September, with later meetings remaining data-dependent.  After a relatively quiet summer, the last week of August was the busiest week for European IG new issuance since mid-June, with corporates and financials both issuing senior and subordinated instruments. We have not seen this weigh on market sentiment, however, as spreads were relatively unchanged at the close of the week.  Looking ahead into September, we have also seen a handful of new HY deals lined up.

EM

Emerging Markets delivered negative returns this month.  While recent developments in China have increased concerns around potential spillover from housing weakness to shadow banking and local government funding stress, August PMIs and policy moves were modestly constructive.  Perhaps even more significantly, the momentum of policy support seems to be accelerating—specifically regarding the housing sector.  In India, despite 2Q23 GDP growth printing close to expectations, there is a growing shadow cast by El Nino on India’s monsoon season, which has produced a disappointingly weak rainfall.  If September rains do not compensate for the deficit in rainfall thus far, food inflation could rise meaningfully.  In Latin America, both Brazil and Mexico are on track for healthy GDP growth this year, although they seem to be traveling on different paths.  Brazil has benefitted from very high agricultural output that has masked some sluggish domestic demand.  By contrast, Mexico has reported robust domestic demand, offsetting a large net export drag.  With US demand accelerating, trade has become a source of potential upside.

OUTLOOK

Despite concerns about the global economic outlook, credit markets have remained technically well-supported with what we believe to be attractive current yield levels.  We have continued to see a divergence between US and European economic data, pointing to a more severe slow-down in Europe versus a more stable economy in the US.  The underlying US economy has shown resilience in the face of the Fed’s tightening cycle, and credit spreads have tightened significantly.  Although defaults remain below long-term averages, we remain prudent— focusing on what we believe to be attractive yields in stable credits.  Second-quarter earnings generally met expectations; however, we did see some disappointing reports drive bond prices lower for some underperforming credits in the market.  We expect to continue to see increasing idiosyncratic risk in credit due to the cumulative effect of tighter monetary policy and higher interest rates.  We also expect primary issuance to pick up within the HY markets as issuers from the loans market look to refinance upcoming maturities.  We maintain diversification within our portfolios and have increased our allocations to more liquid parts of global credit.

Past performance is not a reliable indicator of current or future performance. 

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