In focus

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

This is the first edition of the Schroders Credit Lens, 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. Links to all three versions are provided below and at the bottom of the page.

We hope you find this new publication useful and welcome all feedback.

In summary:

  • Credit spreads are slightly above historical medians although relatively tighter in investment grade (IG) vs. high yield (HY).
  • Lower quality HY bonds have continued to outperform after lagging earlier in the recovery. This indicates a greater appetite from investors to back the most troubled issuers.
  • Banks are much more cautious than corporate bond investors, rightly or wrongly.
  • USD issuance remains relatively brisk as companies continue to build cash reserves. Issuance has been mostly of higher quality bonds in both IG and HY.
  • Corporate leverage is at an all-time high, but better than expected Q2 earnings prevented it from being even worse. However, interest coverage remains adequate in most markets. US HY fundamentals are the most challenging.
  • Defaults in US HY seem to be peaking. The HY energy default rate is approaching the previous high from 2016. Euro HY defaults remain surprisingly muted.
  • The value in emerging market debt (EMD) is in EM currencies and HY hard currency bonds, with local currency yields and IG spreads more or less back to pre-crisis levels.

Examples of our analysis

Note that the chart below is from the perspective of a GBP investor and that equivalent versions for USD and EUR based investors can be found within their respective versions of the Schroders Credit Lens


Click on the images below to download the Credit Lens: