It was a quarter of two halves, with credit markets particularly strong in July due to a shift in investor perception towards the view that central banks will slow their pace of rate hikes. However, following the hawkish comments from the Fed at Jackson Hole, we saw a material deterioration in sentiment for credit markets.
Pressure remained on credit markets in the third quarter, with a continuation of the global macro themes evident earlier in the year. Persistent inflation and a strong labour market have led global central banks to continuously hike interest rates, intensifying recessionary fears once again. On top of this is an energy crisis in Europe, which is putting pressure on consumer and global food prices. That said, simply analysing the quarter’s start and end points hides its rollercoaster nature: credit markets were particularly strong in July and the first half of August – reflecting a bear-market rally; this shifted completely in the second half of August and into September. Driving the initial rally was a shift in investor perception towards the view that central banks will slow their pace of rate hikes and not take monetary policy into overly restrictive territory. This notion was finally put to rest at the annual Jackson Hole central bankers’ summit, where Fed Chair Jerome Powell stated that “restoring price stability will likely require maintaining a restrictive policy stance for some time.”
In the weeks following Jackson Hole, we saw a material deterioration in sentiment for credit markets, which ended the quarter in broadly negative territory. Both high-yield and investment-grade market segments posted negative quarterly returns, although investment grade underperformed given the sharp rise in US Treasury yields. In contrast, loan markets ended the quarter in positive territory – benefiting from their floating-rate nature – however, they gave up most of their earlier gains in the second part of the quarter on similar fears to those outlined above.
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