The September edition of the Schroders Credit Lens highlights that spreads increased marginally in August, alongside the sell-off in equity markets, although US dollar spreads continued to hover around their 2023 lows.
Links to all three versions of the Credit Lens are provided below and at the bottom of the page.
*We also now publish a separate EUR version specifically for Insurance Company Investors.
Corporate bond yields were little changed on the month, now having been at elevated levels for almost a year. Spreads increased marginally in August, alongside the sell-off in equity markets, although US dollar spreads continued to hover around their 2023 lows.
The credit rating migration picture is mixed. Within high yield (HY), net downgrades have been outpacing upgrades over the last year. But ‘rising stars’ have been outpacing ‘fallen angels’, with stronger HY issuers being upgraded to investment grade (IG) at a faster rate than weaker IG issuers are downgraded to HY.
US high-yield default rates have been on an upward trend over the past year, albeit they ticked down in August. In contrast, euro high-yield default rate edged up this month from low levels. Elevated distress ratios in both markets indicate that defaults could continue to increase
US high-yield issuance is still subdued, with very little issuance from highest risk borrowers rated CCC. But refinancing requirements for US high-yield are elevated when looking beyond the next year.
Overall corporate fundamentals weakened slightly in Q2, with higher interest rates starting to have an impact. Earnings growth continued to slow but leverage remained broadly stable.
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.
You can download all three versions of the Credit Lens below: