The August edition of the Schroders Credit Lens highlights a broad-based narrowing in spreads over the month, with USD investment grade (IG) and high yield (HY) reaching new 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 remained elevated, as monetary policy tightening continued. Despite cooling inflation data, higher risk-free rates have persisted, with US long rates edging higher on the month
Broad-based narrowing in spreads over the month, with USD IG and HY reaching new 2023 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
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 HY market saw a marginal uptick in Q1
Default rates in US HY have risen. And more elevated distress ratios indicate that defaults could continue to increase
The credit rating migration picture is mixed. Within HY, net downgrades are outpacing upgrades. But ‘rising stars’ are outpacing ‘fallen angels’, with stronger HY issuers being upgraded to IG at a faster rate than weaker IG issuers are downgraded to HY
US HY issuance is still somewhat subdued, while refinancing requirements are elevated when looking beyond the next year
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.