The January edition of the Schroders Credit Lens highlights that corporate bond yields and spreads declined further in December, as the expected path of central bank policy rates shifted lower.
Links to all three versions of the Credit Lens are provided below.
*We also now publish a separate EUR version specifically for Insurance Company Investors.
Corporate bond yields declined notably in December, as the expected path of central bank policy rates shifted lower. Some areas of the corporate bond market, including Euro and US HY, saw yields reach their lowest levels of 2023. Albeit some of the yield declines were retraced in the first few days of 2024.
Spreads also continued to fall during December, alongside the evolving outlook for interest rates. US IG spreads have reached their lowest level since the Fed started tightening in March 2022. US spreads are much tighter relative to their history than is the case for EUR spreads. Some of the spread narrowing unwound in the first few days of 2024.
The credit rating migration picture is mixed. In HY, net downgrades have been outpacing upgrades over the last year but this trend appears to be fading. By contrast, ‘rising stars’ have been outpacing ‘fallen angels’, with stronger HY issuers being upgraded to IG at a faster rate than weaker IG issuers are downgraded to HY.
While US high yield default rates have moved higher over the past year, they have so far only increased to around average (median) levels. As is the case for Euro high yield default rates.
2023 US HY issuance was above the very low 2022 level but was still subdued, with very little coming from the highest risk borrowers rated CCC. And there was an unusually high proportion of secured issuance.
Overall corporate fundamentals were stable in Q3. The elevated level of interest rates continued to reduce interest coverage ratios but leverage mostly remained in recent ranges.
Chart of the month
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.