In focus

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


Summary:

- Valuations have become unattractive in most cases but recovering economies could keep credit spreads at least stable

- After historically fast spread reversal since March 2020, credit valuations have become unattractive vs history, especially in investment grade where spreads are now at or even below the 25th historical percentile 

- As economies recover in 2021, credit rating agencies could start upgrading issuers. Periods of net ratings upgrades have historically been associated with stable or tightening spreads

- Corporate leverage has peaked in most cases. Although leverage is at all-time highs, interest coverage remains adequate in most markets. US high yield fundamentals are most challenging

- Gross issuance broke all records in 2020. Issuance should be much more muted in 2021 as companies pay down last year’s emergency borrowings

- Assuming investor demand stays strong because of the low level of risk-free yields, muted issuance and ratings upgrades should make a neutral backdrop for credit, despite the relative tightness of spreads

- The value in emerging market debt is in emerging market currencies and high yield hard currency bonds, with local currency yields and investment grade spreads back to pre-crisis levels

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

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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