Credit Chronicle: Q1 2024

Market summary

• At the start of the year, markets were pricing in around 150 basis points of cuts by the US Federal Reserve over the course of 2024, but higher-than-expected inflation and surprisingly strong jobs data has prompted a revision of this.
• Through the quarter we saw US Treasury yields rising and the dollar strengthening, and a steady reduction in the number of 2024 rate cuts priced in (just 65 basis points at the end of the quarter).
• Credit markets generally performed well overall during the quarter, with most delivering positive total returns despite the sell-off in government bond yields.
• Unsurprisingly the top-performing asset classes were floating-rate products, namely leveraged loans and structured credit (collateralised loan obligations). These benefited from the rise in risk-free rates, especially in the US.
• US and European high-yield bonds also performed well, as credit spreads tightened to help offset the negative impact of rising interest rates.
• The bank capital market, comprising AT1s, enjoyed a strong quarter, as it continued to recover from the volatility seen over much of 2023 (see here for more details).
• In contrast, the US investment-grade market posted negative total returns due to its higher sensitivity to interest-rate moves, while the returns from the European investment-grade market were modestly positive.

Where to focus and what to avoid

• Higher carry (higher income) holdings such as structured credit, loans, and selective parts of the short-duration high-yield and bank capital market, offer an attractive income profile and favourable downside characteristics, in our view.
• In traditional markets, such as high-yield debt and US investment grade, credit spreads are nearing the tightest (most expensive) levels seen over previous cycles; we believe these offer limited potential for further price appreciation or attractive income.

For the full breakdown of Q1 and to see our latest scorecards for the credit universe, read the PDF below.

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