A volatile end to 2021
The fourth quarter proved to be volatile for credit markets, with reaction to news of the new COVID-19 variant and a hawkish pivot by the US Federal Reserve (Fed) – in the face of persistent inflationary pressures – both weighing on the market. Markets reacted sharply to news of the Omicron variant as governments tightened border controls and introduced various restrictions. This led to a sharp sell-off in November. Sentiment improved in December as research (led by experts in South Africa) suggested that Omicron is milder than earlier variants, and some nations began to soften their stance on restrictions, helping credit markets to recover much of the November impact.
Volatility was particularly pronounced in high-yield (HY) credit markets and the global HY market posted a negative quarterly return for the first time since Q1 2020. Lower-rated HY underperformed, but spreads overall ended Q4 largely unchanged, having rallied back from the November widening. Investment grade (IG) credit was flat overall; gains in the US contrasted with falls in Europe, where Omicron weighed heavier. IG spreads widened somewhat in both regions, but strong net inflows continued to provide a helpful counterbalance to high issuance volumes, with 2021 second only to the previous year’s record issuance levels.
Despite various headwinds – including regulatory tightening and lack of liquidity in China’s real estate sector, which intensified in Q4 – EM corporate credit was resilient in 2021. Elsewhere, loans and CLOs continued to deliver relatively stable, resilient returns through a volatile end to 2021 for risk assets; the loans market posted another strong quarter of performance, either matching (US) or outperforming (Europe) regional high-yield markets, capping off a strong year, with strong inflows also a feature in that market.
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