In focus

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


The Q2 edition of the Schroders Credit Lens highlights the tug of war between expensive valuations and improving fundamentals and the concerns regarding recent resurgence of M&A activity.

Links to all three versions of the Credit Lens are provided below and at the bottom of the page. 

Summary:

  • Credit spreads have held up well despite the significant increase in government bond yields. Valuations remain unattractive vs history, especially in investment grade (IG)
  • As the recovery gathers pace, credit rating agencies are starting to upgrade issuers. Periods of net ratings upgrades have historically been associated with stable/tightening spreads
  • Corporate fundamentals have started to improve across the board. Leverage fell in most markets in Q4 and interest coverage ticked higher. Higher yields should not hurt fundamentals too much in the near term
  • Issuance has been surprisingly high so far in 2021, despite already large corporate cash balances. While part of this can be explained by companies refinancing their debt in anticipation of higher yields, M&A activity has also picked up recently
  • At the same time, demand for credit has remained resilient, even for longer maturity bonds. This can be explained by pension funds purchasing long-term bonds, as funded statuses improve, buoyed by very strong equity markets
  • In emerging market debt (EMD), sovereign bonds, both local and hard currency, have taken a hit from higher developed market (DM) yields. Hard currency EM corporates have held up relatively well

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.

You can download all three versions of the Credit Lens below:

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