Market summary
- The US Treasury market remained volatile. In April, a combination of sticky inflation, signs of labour market resilience, and hawkish Fed comments caused a sharp rise in US Treasury yields and rate-cut expectations were pushed back. Subsequently, weaker jobs and inflation data helped yields to retreat, but the 10-year yield still ended the quarter higher.
- European bond yields also rose over the second quarter, driven by sticky inflation and better-than-expected economic data earlier in the period. The rise in yields was particularly pronounced in France – the snap election there drove a sell-off.
- Credit markets had a positive quarter from a total return perspective. The top performers were assets with floating-rate coupons, such as leveraged loans and collateralised loan obligations (CLOs). Both benefited from the rising risk-free rates early in the quarter, with high carry providing a boost over the rest of the period. The loan market was also boosted by credit spread tightening, helped by continued strong demand for the asset class.
- High-yield bonds in the US and Europe performed well from a total return perspective, driven primarily by carry. Turning to the investment-grade market, while the June rally in government bond markets helped, both the US and European markets only managed to deliver a slightly positive total return over the quarter.
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 traditional markets, such as high-yield debt and US investment grade, credit spreads remain near the tightest (most expensive) levels seen over previous cycles; we see limited potential here for further price appreciation or attractive income.
- From a sector standpoint, we continue to see selective value in the banking sector in both senior and subordinated instruments.
For the full breakdown of Q2 and to see our latest scorecards for the credit universe, read the PDF below.
