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

The Q4 edition of the Schroders Credit Lens highlights how the European energy crisis has brought an abrupt end to the summer lull, and the sharply higher levels of lower quality leveraged loan and corporate bond issuance in 2021. 

Links to the Credit Lens below. 

• Credit Lens (USD)

Summary: 

• Credit spreads have exhibited more volatility after the summer lull. The sharp increase in energy prices is weighing on Europe. The euro high yield (HY) spread is the widest since February (as of 12 October)
• Valuations are generally unattractive. There is slightly more space in HY for spreads to fall because of improvements in credit quality over time
• Low quality issuance has increased significantly in 2021, especially in US leveraged loans. Record investor demand for loans has allowed more speculative issuance to flourish
• In investment grade (IG) credit, M&A related issuance has increased in 2021, but it is still much lower than in the 2015-2018 period. A greater share of deals have been financed by shares or cash
• Credit rating agencies are upgrading issuers in volume. This has countered the negative impact of low quality issuance so far. Upgrades from HY to IG have been surprisingly limited
• In hard currency emerging market debt (EMD), spreads of HY bonds remain well above pre-Covid levels and dispersion between these bonds is wide. The fallout from Evergrande has been minimal
• Real yield differential between emerging market (EM) and developed market (DM) bonds has increased significantly in 2021 on the back of accelerating US inflation. This implies solid value in local currency EM bonds and EM currencies 

Background on the Schroders Credit Lens:

The Schroders Credit Lens is a comprehensive quarterly 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 (EMD).

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. The EMD section also covers some of the specific features of this market. For example, the split of the market between investment grade and high yield bonds for hard and corporate EMD, and the attractiveness of real yields and emerging currencies for local currency EMD.

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.