In focus

Schroders Credit Lens Q2 2022: your go-to guide to global credit markets


The Q2 edition of the Schroders Credit Lens highlights a swift recovery in the credit markets, a slightly weakening technical backdrop, and the effect of US rate hikes on the appeal of US dollar credit.

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

For a comprehensive emerging market debt (EMD) presentation, please see Schroders Emerging Markets Lens.

Summary: 

Credit spreads staged an impressive reversal in March, retracing the widening caused by Russia’s invasion of Ukraine.

High yield (HY) spreads are closer to the tight levels of 2021 than investment grade (IG) spreads. Heavy IG issuance compared to very light HY issuance can partially explain this dynamic.

Technicals have become somewhat more mixed. Default rates in HY remain at record lows. However, a slight increase in distress ratios and greater dispersion between bonds could herald a pick-up in defaults.

Ratings moves show a mixed picture. Within US HY, downgrades exceeded upgrades in March for the first time in a year. But, at the upper end of the HY scale, there has been a rise in the value of bonds being upgraded to IG.

US credit’s appeal is waning for hedged euro investors, while euro credit’s appeal is rising for hedged USD investors. Aggressive Federal Reserve (Fed) rate hikes are making hedging USD exposure costly for euro investors, while adding to the return of hedged US investors

Q4 corporate fundamentals’ data show that deleveraging has likely come to an end in most markets. Nonetheless, interest coverage, corporate margins and liquidity metrics all remain solid.

There are some signs of late cycle behaviour. In HY, M&A/LBO related issuance exploded in 2021. In IG, M&A related issuance also increased in 2021.

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.

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.

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

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