The year started positively, as the US and China signed into effect ‘phase one’ of their trade deal. However, before long, news of the worsening coronavirus (COVID-19) outbreak in China began to drive fear into markets. First, this saw investors shun risk in favour of higher-rated assets, in a reversal of moves seen in late 2019. US Treasury yields fell, helping investment-grade debt to outperform high-yield debt. But then came the oil price war, as cooperation within OPEC+ broke down. As COVID-19 progressed to global pandemic status, so began one of the fastest ever sell-offs, pushing credit market valuations to levels normally seen in times of recession, and reaching all parts of the global credit market, even traditional safe havens.
It seems markets eventually found a ‘floor’ – albeit one that’s possibly temporary in nature – before rebounding towards the end of the quarter. Monetary policy action was a key catalyst for this positive shift. Specifically, the US Federal Reserve stepped up its support, with various measures having a direct, positive impact on credit markets. The Fed’s participation in the primary and second US corporate bond markets, plus a new two-trillion dollar fiscal package have provided a further fillip for the overall mood in markets.
Where does that leave credit investors? While the level of uncertainty – both economic and virus related – remains high, we believe that the pronounced repricing of credit spreads in the quarter now offers a variety of attractive opportunities for discerning credit investors. However, selectivity and dynamism will be key to capitalising on this opportunity, especially with a marked increase in defaults looming.
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