Corporate Credit Snapshot

US

In the US, credit markets delivered positive returns in March, spurred by a supportive macro backdrop—including reduced Treasury volatility—and favorable credit fundamentals. Riskier rated credits within US high yield and US investment grade corporates outperformed their broad categories, but overall, high yield and investment grade returns were similar. The Federal Reserve meeting this month struck a dovish tone, with implications that a first rate cut in June looks tenable and an estimated three rate cuts for the year.

EUROPE

In Europe, credit markets delivered positive returns in March.  Spreads continued to tighten, particularly in the first half of the month. The soft-landing narrative remains firmly in place, with rates broadly lower on the month and the dovish tone of the European Central Bank meeting indicating that a June rate cut looks increasingly likely.  There was healthy activity in the primary market on both the investment grade and high yield side, with a noticeable pick-up for the high yield market where issuance was easily absorbed by continued inflows to the asset class. 

EM

Emerging Market (EM) debt delivered positive performance as spreads continued to grind tighter; fundamentals remain strong and defaults have been contained.  In this environment, high yield outperformed investment grade, with the strongest returns coming from the lower-rated segments of the market. By sector, the best performers came from areas such as energy and automotives while financials were weaker. Longer-duration bonds outperformed their shorter-duration counterparts. Sovereigns from the stressed lower-rated countries of Argentina and Ukraine delivered notable performance. This month, supply remained tight, with issuance lagging other sub-asset classes. This is likely the result of reduced supply from China as issuers access cheaper local funding and demand for Chinese high yield wanes.  Central bank decisions were prevalent this month; as fears of a hard landing recede for developed markets, dovish sentiments were echoed by various EM central banks—especially throughout Latin America—while there were some outliers (e.g., Turkey, Taiwan, etc.).  EM continues to benefit from robust technicals—shrinking supply, historically robust seasonal performance, and current risk-on sentiment—as we head into the second quarter.

OUTLOOK

This month we had relatively dovish commentary from both the Federal Reserve and the European Central Bank following moderated inflation data in February.  There is an expectation, however, that rate cuts by both central banks are unlikely to start until June.   While the Federal Reserve remains on hold and post-meeting commentary has been relatively benign, the central bank seems committed to staying data dependent and the data generally remains strong.  For credit investors year to date, spreads and coupons have cushioned the negative total return impact of rising government yields, leading to positive excess returns across global credit across the board.  While spreads have compressed, yields remain high.  Prices remain discounted on average, providing some cushion for potential additional interest rate volatility.  Globally, trailing 12-month defaults across high yield markets remain below the long-term average.  Looking ahead, we anticipate continued primary market activity as companies address upcoming maturities and investors deploy cash balances.