The November edition of the Schroders Credit Lens highlights that corporate bond yields moved higher in most major markets, with US investment grade (IG) touching their highest level this tightening cycle, reflecting both wider spreads and a steeper US treasury curve.
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.
Spreads widened in October alongside general weaker sentiment in markets, amid growing expectations of higher-for-longer interest rates. Corporate bond yields moved higher in most major markets, with US investment grade (IG) touching their highest level this tightening cycle, reflecting both wider spreads and a steeper US treasury curve
As well as higher yields, duration has shortened. Low issuance in the past two years means that high-yield (HY) duration is the lowest for two decades. Higher yields and lower duration mean that investors can absorb a larger rise in yields before they would be left nursing losses.
The credit rating migration picture is mixed. In HY, net downgrades have been outpacing upgrades over the last year but this trend appears to be fading. By contrast, ‘rising stars’ have been outpacing ‘fallen angels’, with stronger HY issuers being upgraded to IG at a faster rate than weaker IG issuers are downgraded to HY.
US high-yield default rates have continued to gradually move higher, extending the trend seen over the past year. The Euro high-yield default rate has also risen from low levels in recent months. Elevated distress ratios in both markets indicate that defaults could continue to increase.
US HY issuance is above the very low 2022 levels but remains subdued, with very little coming from highest risk borrowers rated CCC. This contrasts with elevated refinancing requirements in the coming years.
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.