Market summary
- It was a mixed end to a strong year in global credit markets, against a backdrop of rising sovereign bond yields.
- Assets with floating-rate coupons - such as collateralised loan obligations (CLOs) - delivered the best total returns, as these offered protection from the rise in yields.
- High-yield bonds in Europe meaningfully outperformed those in the US, with credit spreads tightening more in the former.
- In the investment-grade market, European assets outperformed; the sharp rise in Treasury yields weighed on the US market. Credit spreads ended the period tighter in both markets.
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 markets – offer an attractive income profile and favourable downside characteristics.
- In traditional markets – such as US 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 see value in selective parts of the banking sector – in both senior and subordinated instruments – although this is less pronounced than a year ago. We also see better value in more defensive sectors than in cyclical sectors given compressed valuations between the two.
For the full breakdown of Q4 and to see our latest scorecards for the credit universe, read the PDF below.
