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

The February edition of the Schroders Credit Lens highlights that elevated yields and lower volatility are increasing investors’ risk appetite in early 2023, despite less appealing valuations.

The link to the Credit Lens is provided below. 

• Credit Lens_USD

Summary: 

Global credit markets have had a stellar start of the year. The combination of attractive yields and declining volatility has been a draw for credit investors.

After recent spread narrowing, valuations have become less attractive, especially in the US. History suggests that spreads could fall further, but this would likely require a benign economic outlook.

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

2022 issuance was slightly lower in investment grade (IG) compared to 2021 but fell drastically in HY. Very limited maturities in the near term reduce the need for issuance.

Q4 earnings so far have been more on the weaker side, but analysts expect 2023 earnings to still hold up relatively well.

Corporate fundamentals data shows that leverage has remained stable, aided by very low debt growth. Interest coverage, on the other hand, has started to move lower on rising interest costs

Looking ahead, unless earnings fall meaningfully, leverage is unlikely to increase sharply. Still, rising interest costs and pressure on margins from higher costs are likely to continue to erode fundamentals.

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.