At the macro level, the last quarter of the year was a strong one for credit markets, thanks to a decisive positive shift in the macro backdrop.
November brought a positive shift in both investor sentiment and market performance, on reignited hopes that the US Federal Reserve’s (Fed’s) rate-hiking cycle had come to an end and that the Fed could begin cutting rates in 2024.
This resulted in a sharp decline (rally) in US Treasury yields across the yield curve, with the 10-year note ending the year at 3.88% (having begun the year at 3.87% and the quarter at 4.57%).
In the Euro Area, inflation hit a two-year low, influenced by declining energy prices and a slowdown in food-price inflation. Combined with dovishness from the European Central Bank, this helped European bond yields to fall.
The fall in risk-free rates and improved risk appetite led to a strong quarter for total returns across global credit markets. Global high-yield markets posted their best quarter since Q2 2020, with the rally in spreads and yields driven by renewed hopes of a soft landing for major economies.
US and European high-yield debt markets returned 7.7% and 5.6% respectively, to end the year up 13.5% and 12.8%. Global investment-grade markets also finished the year on a very strong note, returning 7.1% in Q4; although credit spreads tightened by 10bps in the quarter to reach multi-year lows, the move in risk-free rates was the primary driver here.
While floating-rate assets, such as collateralised loan obligations (CLOs), lagged fixed-coupon areas of the market, spread tightening across rating categories allowed them to also participate in the rally.
For the full breakdown of Q4 and to see our latest scorecards for the credit universe, read the PDF below.
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