Credit Chronicle: Q3 2021
The latest credit market review from Ninety One’s Developed Market Credit team. This edition’s focus article discusses recent ESG developments in the CLO market.
A combination of mainly robust economic data in the US and rising confidence among US and European consumers and businesses boosted market sentiment in what was a positive quarter for most financial markets. One of the stories of the quarter was the fall in government bond yields and correspondent rise in prices, which was in complete contrast to the “reflation” sell-off in the first quarter. While the US Federal Reserve (Fed) has generally maintained its supportive narrative and its desire to strike a balance between job market health and inflation, we saw a slightly more hawkish tilt in June, whereby indications of the timeframe for raising rates were brought forward. Somewhat perplexingly, although US Treasuries initially sold off on this news, they subsequently rallied – seemingly due to concerns over the rapidly spreading Delta variant of COVID as well as a perceived abatement in inflationary pressures.
Given this supportive market backdrop, both the global high-yield and global investment-grade (IG) markets produced positive returns, of 2.4% and 2.5% respectively. High-yield bonds continued to benefit from strong demand as investors hunted for yield, while IG markets rebounded from the first quarter as both credit spreads and risk-free rates declined, particularly in the US. Elsewhere, the loans market lagged high-yield bonds due to the floating rate nature of the assets in a quarter when government bonds rallied. In terms of issuance, the high-yield market saw a record half year, with volumes up 50% on last year. Loan issuance across the US and Europe also remained strong, although the US saw some comparative respite from the exceptional issuance levels of the first quarter.
For a more detailed view of major global credit markets and this quarter’s feature article “The ‘greening’ of credit markets” please download the latest Credit Chronicle.
Default: There is a risk that the issuers of fixed income investments (e.g. bonds) may not be able to meet interest payments nor repay the money they have borrowed. The worse the credit quality of the issuer, the greater the risk of default and therefore investment loss. Derivatives: The use of derivatives may increase overall risk by magnifying the effect of both gains and losses leading to large changes in value and potentially large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Interest rate: The value of fixed income investments (e.g. bonds) tends to decrease when interest rates rise. Liquidity: There may be insufficient buyers or sellers of particular investments giving rise to delays in trading and being able to make settlements, and/or large fluctuations in value. This may lead to larger financial losses than might be anticipated.
All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results.