Credit Chronicle: Q2 2023

Rising appetite for risk underpinned a positive quarter for credit markets. Following the rally, we examine whether investors are still being compensated fairly for default risk in high-yield markets.

21 Jul 2023

17 minutes

DM Credit Team

Despite the rise in many developed market sovereign yields, credit markets performed well during Q2. High-yield markets are now pricing a fairly benign default scenario. But with a more testing operating environment ahead, current valuations may warrant caution and a bias towards quality.

Market summary

  • The quarter began on a positive note as risks facing the global banking sector began to dissipate. US debt-ceiling concerns then drove uncertainty, but the necessary deal passed and investors’ focus shifted to global growth dynamics and signals of further rate hikes from key central banks.
  • The US Federal Reserve hiked interest rates by 25bps in May and signalled that further hikes are likely to be needed. This, combined with data evidencing US economic resilience, drove up yields across the US Treasury curve.
  • Despite this, credit markets performed well. High-yield market spreads tightened, helping to drive positive total returns. Rising appetite for risk coupled with light positioning in riskier parts of the market further helped the asset class.
  • Returns were more muted in the investment-grade market. The lure of historically high yields drove up demand for the asset class and caused spreads to tighten, but the rise in risk-free rates offset this.
  • The loan market was the star performer, continuing its impressive year-to-date run. The asset class continued to benefit from its floating-rate structure, protecting investors from the rise in risk-free rates, while constrained new issue volumes kept demand levels above supply, providing a tailwind.

For the full breakdown of Q2 and to see our latest scorecards for the credit universe, read the PDF below.

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Authored by

DM Credit Team

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