Schroders Credit Lens February 2023: your go-to guide to global credit markets
Our monthly analysis highlights the charts and data that matter to investors in corporate credit.
Authors
The February edition of the Schroders Credit Lens highlights that elevated yields and lower volatility are increasing investors’ risk appetite in early 2023, despite less appealing valuations.
Links to all three versions of the Credit Lens are provided below.
Summary:
Global credit markets have had a stellar start of the year. The combination of attractive yields and declining volatility has been a draw for credit investors.
After recent spread narrowing, valuations have become less attractive, especially in the US. History suggests that spreads could fall further, but this would likely require a benign economic outlook.
Default rates in high yield (HY) have slowly started to rise. More elevated distress ratios indicate that defaults could start to increase in 2023.
2022 issuance was slightly lower in investment grade (IG) compared to 2021 but fell drastically in HY. Very limited maturities in the near term reduce the need for issuance.
Q4 earnings so far have been more on the weaker side, but analysts expect 2023 earnings to still hold up relatively well.
Corporate fundamentals data shows that leverage has remained stable, aided by very low debt growth. Interest coverage, on the other hand, has started to move lower on rising interest costs
Looking ahead, unless earnings fall meaningfully, leverage is unlikely to increase sharply. Still, rising interest costs and pressure on margins from higher costs are likely to continue to erode fundamentals.
Background on the Schroders Credit Lens:
The Schroders Credit Lens is a comprehensive monthly overview of the global credit market.
It is packed full of data and insights on dollar, euro and sterling investment grade and high yield bonds, and on hard currency, local currency and corporate emerging market debt.
Importantly, as well as assessing each area individually, the Schroders Credit Lens also shows how they compare with each other, in terms of relative attractiveness. This is likely to be of particular interest to those involved in making, or advising on, asset allocation decisions.
The corporate credit section (investment grade and high yield bonds) includes a deep dive into valuations, fundamentals and technicals.
Many investors hedge currency risk when investing in overseas bond markets and hedged yield levels vary significantly depending on your domestic currency. As a result, we have produced three versions of the pack, one each from the perspective of a sterling, dollar and euro based investor.
We hope you find this publication useful and welcome all feedback.
Learn more about the Schroder Fixed Income Fund
Important Information:
This document is issued by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders). It is intended solely for wholesale clients (as defined under the Corporations Act 2001 (Cth)) and is not suitable for distribution to retail clients. This document does not contain and should not be taken as containing any financial product advice or financial product recommendations. This document does not take into consideration any recipient’s objectives, financial situation or needs. Before making any decision relating to a Schroders fund, you should obtain and read a copy of the product disclosure statement available at www.schroders.com.au or other relevant disclosure document for that fund and consider the appropriateness of the fund to your objectives, financial situation and needs. You should also refer to the target market determination for the fund at www.schroders.com.au. All investments carry risk, and the repayment of capital and performance in any of the funds named in this document are not guaranteed by Schroders or any company in the Schroders Group. The material contained in this document is not intended to provide, and should not be relied on for accounting, legal or tax advice. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this document. To the maximum extent permitted by law, Schroders, every company in the Schroders plc group, and their respective directors, officers, employees, consultants and agents exclude all liability (however arising) for any direct or indirect loss or damage that may be suffered by the recipient or any other person in connection with this document. Opinions, estimates and projections contained in this document reflect the opinions of the authors as at the date of this document and are subject to change without notice. “Forward-looking” information, such as forecasts or projections, are not guarantees of any future performance and there is no assurance that any forecast or projection will be realised. Past performance is not a reliable indicator of future performance. All references to securities, sectors, regions and/or countries are made for illustrative purposes only and are not to be construed as recommendations to buy, sell or hold. Telephone calls and other electronic communications with Schroders representatives may be recorded.
Authors
Topics