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Schroders Credit Lens March 2023: your go-to guide to global credit markets

Our monthly analysis highlights the charts and data that matter to investors in corporate credit.

09/03/2023
Credit Lens

Authors

Harry Goodacre
Strategist, Strategic Research Unit

The March edition of the Schroders Credit Lens highlights that corporate bond yields reversed some of the falls seen in January, and the strength of the rally in credit spreads has faded.

Links to all three versions of the Credit Lens are provided below. 

Summary: 

Corporate bond yields remain elevated and reversed some of the falls seen in January, on anticipation of policy rates staying higher for longer.

High-yield (HY) credit spreads continued to tighten over the month, but the year-to-date (YTD) rally faded slightly, and investment-grade (IG) spreads were little changed.

Compensation for duration risk remains low, with credit curves being very flat. Longer maturity bonds offer little extra yield over shorter dated bonds.

Issuance has started the year strongly, with YTD investment-grade issuance notably higher than the same period in 2022. Although high-yield issuance is slightly down.

Default rates in high-yield have slowly started to rise. More elevated distress ratios indicate that defaults could start to increase in 2023.

Corporate fundamentals remained strong in Q4. However, corporate margins are now clearly falling. If costs continue to rise faster than sales, margins will remain under pressure in 2023, and earnings growth could disappoint.

Equity analysts expect earnings to be broadly flat in 2023. Given still slow debt growth, this would likely be sufficient to keep corporate leverage stable.

Interest coverage is very high, especially in IG, but is likely to deteriorate from here, as higher yields are now starting to meaningfully feed through to interest expense. Issuers with loans are seeing the most immediate impact.

Cash on balance sheet increased in Q4 for the first time the since Q2 2020.

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.

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Authors

Harry Goodacre
Strategist, Strategic Research Unit

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