Global credit delivered mixed returns in February with spread tightening offset by interest rate pressure across the US, Europe, and Emerging Markets (EM)
In the US, high yield continued to deliver positive performance supported by persistent demand, low supply, and attractive yields. Given rate pressure and a rising Treasury yield, investment grade risk assets and Treasurys posted negative returns
In Europe, returns followed a similar trend as spreads moved tighter and rates trended higher with the market continuing to push back expectations around rate cuts from the European Central Bank (ECB), supported by hawkish comments from various ECB members
Emerging Market (EM) debt outperformed US and European credit this month. Within Asia, policy support in China is building as fiscal initiatives have been accompanied by a large ongoing injection of liquidity. In Latin America, there are ample signals of growth for the region ahead
US
US fixed income credit delivered mixed returns in February with spread tightening offset by interest rate pressure. High yield continued to deliver positive performance supported by persistent demand, low supply, and attractive yields. Given rate pressure and a rising Treasury yield, investment grade risk assets and Treasurys posted negative returns. Confidence in the stability of growth increased this month—driven by strong inflation data and a PCE (Personal Consumption Expenditure) report that was in line with expectations—pointing to rates staying the same in March. At the same time, prices remain at discounts to par and yield levels remain well above the longer-term averages, providing a strong return catalyst.
EUROPE
In Europe, credit markets delivered mixed returns in February. Rates trended higher with the market continuing to push back expectations around rate cuts from the European Central Bank (ECB), supported by hawkish comments from various ECB members. Spreads moved tighter; high yield continued to deliver positive performance supported by persistent demand, low supply, and attractive yields. Given rate pressure and rising government bond yields, investment grade and government bonds declined. This month, we saw limited performance dispersion across ratings and sectors with market attention firmly on macro-economic data—particularly inflation data at month-end and the timing of upcoming rate cuts. Interest in corporate credit remains robust with yields well above longer term averages, and both good carry and reasonable value on offer.
EM
Emerging Market (EM) debt outperformed US and European credit this month. Within EM, high yield continued to deliver positive performance supported by persistent demand, low supply, and attractive yields. Given rate pressure and a rising US Treasury yield, investment grade EM debt and government bonds posted negative returns. Policy support in China is building as fiscal initiatives have been accompanied by a large ongoing injection of liquidity. In Japan, given the large gap between strong market momentum and softening economic activity, we believe the Bank of Japan’s changes in its asset purchase programs will take precedence over rate hikes at the start of policy normalization. In Turkey, there was strong growth reported despite rate hikes as household consumption improved. In Latin America, growth continues for the region, despite a stall in Brazil’s reported 4Q23 GDP growth. However, amidst expectations that Mexico’s GDP growth will benefit this quarter from strong domestic demand and fiscal spending ahead of elections, and evidence of gains made across Chile’s manufacturing, mining, and retail sectors, there are ample signals of 1Q24 recovery for the region.
OUTLOOK
Looking ahead to March, we will have the Federal Reserve (Fed) and the European Central Bank meetings towards the beginning and end of the month, respectively. The Fed has clearly stated that their concern about bringing inflation down to their target still trumps their worries about staying restrictive for too long and slowing economic growth. We are hearing that the primary market in the US should slow after several large M&A transactions were funded in February, whereas activity in the European primary markets is likely to pick-up. We continue to see strong demand for credit from various corners of the market—investors coming out of cash and money-market funds as the fear of rate hikes fades, pension funds whose funding positions have improved and are consequently rotating from equities into credit, and insurance companies looking to lock in historically attractive yields. We therefore anticipate spreads to be supported at current levels driven by continued inflows, with ongoing tightening in higher-yielding parts of the market.
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