Credit Chronicle: Q1 2021

Read the latest investment review from Ninety One’s Developed Market Credit team. Covering the major global credit markets, it includes a special focus article, offering a timely insight into a key topic for investors.

Apr 20, 2021

18 minutes

DM Credit Team
High yield bonds significantly outperformed investment grade, as the longer duration parts of the market succumbed to the moves in US Treasuries

The US 10-year Treasury yield rose sharply to a 12-month high, reflecting expectations of brighter prospects for the global economy and higher inflation, as well as being fuelled by the Biden administration’s US$ 1.9 trillion stimulus package. This aggressive rise in yields dampened the bullish sentiment seen during the first half of the period as unease increased about the effects of a possible US rate rise.

In credit markets, high yield bonds significantly outperformed investment grade (IG), as the longer duration parts of the market succumbed to the moves in US Treasuries. Global IG declined by 3.2% in US dollar terms, while global high yield produced +0.7% as European and US CCCs posted strong returns. Given the floating rate nature of the loans market, it has comfortably outperformed most other credit asset classes year-to-date, with the US and European loans market returning 1.8% and 2.3% respectively. Q1 was also a record setting period for high yield market issuance, as companies were enticed by historically low borrowing costs. In the IG space, new issuance was up 20% year-on-year but was readily absorbed by the market as strong inflows in the US continued to provide support.

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Specific risks

Default: There is a risk that the issuers of fixed income investments (e.g. bonds) may not be able to meet interest payments nor repay the money they have borrowed. The worse the credit quality of the issuer, the greater the risk of default and therefore investment loss. Derivatives: The use of derivatives may increase overall risk by magnifying the effect of both gains and losses leading to large changes in value and potentially large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Interest rate: The value of fixed income investments (e.g. bonds) tends to decrease when interest rates rise. Liquidity: There may be insufficient buyers or sellers of particular investments giving rise to delays in trading and being able to make settlements, and/or large fluctuations in value. This may lead to larger financial losses than might be anticipated.

All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results.

Authored by

DM Credit Team

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