The July edition of the Schroders Credit Lens highlights that while corporate bond yields in many markets have remained within recent ranges, GBP investment-grade yields have moved closer to their autumn 2022 peak levels
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.
Risk free rates continued to edge higher on the month, but corporate bond yields in many markets remained within recent ranges. The exception is in the GBP investment-grade market where yields moved closer to their autumn 2022 peak levels.
Spreads were flat or slightly down in June, with USD high-yield around year-to-date lows. Spreads have been unusually stable in the face of the sharp tightening in Bank lending conditions this year. Historically spreads have widened a lot in such situations
Credit curves continue to be very flat, with longer maturity bonds offering little or no yield pick-up over shorter maturity bonds.
Overall corporate fundamentals remained strong in Q1, but higher interest rates are starting to have an impact. Interest coverage ratios, whilst still elevated, have started to fall, reflecting a significant increase in interest expense.
Earnings growth and corporate margins are lower than the peak levels seen in recent years. Leverage continues to be lower than the pandemic era peaks, although the high-yield market saw a marginal uptick in Q1.
Default rates in US high-yield are rising. And more elevated distress ratios indicate that defaults could continue to increase.
US high-yield issuance has picked up from very low levels, with the secured proportion being unusually high.
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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