Credit Chronicle: Q1 2023

Reflecting on a volatile first quarter, our Developed Market Credit team discusses turmoil in the banking sector and shows how this has driven higher-quality parts of the market to historically attractive valuations.

20 Apr 2023

18 minutes

DM Credit Team

It was a tumultuous quarter, with the collapse of Silicon Valley Bank and UBS’ takeover of Credit Suisse rocking financial markets. Yet most credit markets had a positive Q1, with bank capital the notable exception. Crucially for active investors, the resultant market dislocation once again presents opportunities to capture historically attractive yields without having to compromise on quality.

Market summary

  • The quarter began on a positive note, with sentiment continuing to improve as China reopened from COVID faster than expected and US inflation appeared to be slowing. This faltered in February as various macro data prints caused investors to anticipate tighter monetary policy.
  • Sentiment soured further in March after the collapse of Silicon Valley Bank, with market participants fearing contagion across the banking sector. The UBS takeover of Credit Suisse subsequently dominated headlines, catching the market by surprise, not least given the Swiss regulator’s controversial decision to allow equity holders to retain some value after writing off Credit Suisse’s bank capital debt to zero.
  • While these events weighed heavily on the bank capital market, the rest of the credit market had a positive quarter. Yet overall spread and total return figures disguise a significant amount of volatility, especially in the high-yield market, which saw spreads whipsaw month-by-month, but finished the Q1 slightly tighter overall.
  • In the investment-grade debt market, spreads widened slightly over the quarter but the risk-off shift in sentiment driven by banking sector headlines caused a significant drop in risk-free rates, driving positive total returns.
  • Loan markets were not immune to the volatility, as sentiment shifted from stubborn inflation concerns to outright recession worries, with the latter weighing on this segment of the market.

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DM Credit Team
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