In focus

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


The Q3 edition of the Schroders Credit Lens highlights the narrowing dispersion in the HY bond market, strong demand for US corporate bonds from overseas investors and the worrying resurgence of leveraged buyout activity. 

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

Summary:

  • Credit spreads continue to inch lower. Dispersion between bonds has fallen to 2007 levels in some markets. Valuations are unattractive vs history in both investment grade (IG) and high yield (HY). There is slightly more space in HY for spreads to fall further because of improvements in credit quality over time
  • Credit rating agencies are upgrading issuers in volume. Periods of net ratings upgrades have historically been associated with stable/tightening spreads
  • On average, companies are deleveraging, assisted by buoyant earnings growth. Many companies have managed to reduce their interest bill through refinancing existing, higher yielding debt
  • Issuance has remained high in 2021, despite already large cash balances. Very low nominal and negative real corporate bond yields are encouraging issuance with little obvious need for extra cash. Demand from derisking defined benefit pension funds could help to digest the issuance
  • More worringly , US leveraged buyout deal (LBO) volume has increased sharply recently. This is could to lead to a fall in the quality of US HY issuance
  • Foreign demand for US corporate bonds remains strong as currency hedged USD yields are attractive
  • In emerging market debt (EMD), local currency bonds and EM currencies have recovered most of the sell off seen earlier this year, aided by stability in US bond yields and rate hikes by EM central banks

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:

Banner-Credit-Lens-EUR-506560.png

Banner-Credit-Lens-GBP-506560.png

Banner-Credit-Lens-USD-506560.png

Important Information
The contents of this document may not be reproduced or distributed in any manner without prior permission.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect nor is it to be construed as any solicitation and offering to buy or sell any investment products. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Any security(ies) mentioned above is for illustrative purpose only, not a recommendation to invest or divest. Opinions stated are valid as of the date of this document and are subject to change without notice. Information herein and information from third party are believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.
Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Derivatives carry a high degree of risk. Exchange rate changes may cause the value of the overseas investments to rise or fall. If investment returns are not denominated in HKD/USD, US/HK dollar-based investors are exposed to exchange rate fluctuations. Please refer to the relevant offering document including the risk factors for further details.
This material has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.