Market summary
- For many months, strong fundamentals have provided a useful underpin to credit markets, but unprecedented demand has been the key driver of spreads compressing – making valuations perilously high in some traditional market segments.
- While this backdrop continued in Q1, trade tariff-related concerns had already begun to make an impact, with spreads widening across investment-grade and high-yield markets.
- Unsurprisingly, the biggest moves in credit markets came post-quarter end, after President Trump’s “Liberation Day” tariff announcements.
- Concerns over the global growth outlook and uncertainty around the impact of tariffs have driven a significant repricing across credit markets, with credit spreads in traditional markets, such as US high yield, materially wider than at the start of the year.
Where to focus and what to avoid
- In the current environment, caution and a careful eye on fundamentals are key. Investors must be selective to ensure they limit their exposure to businesses that are likely to face a material new shock to their operating model.
- The investment team is favouring more defensive areas and domestically oriented sectors, which are less likely to be impacted by trade tariffs.
- Overall, the team prefers lower-spread duration and higher-quality components of the investment opportunity set.
- More broadly, there is still a healthy degree of dispersion between asset classes, both in terms of valuations and fundamentals. Specialist areas of the credit market continue to stand out. Even here, though, selectivity is key.
- As risk premia start to rise, the team expects new opportunities to emerge over the coming weeks.
For the full breakdown of Q1 and to see our latest scorecards for the credit universe, read the PDF below.
