Key Takeaways
- Global credit generated mostly positive returns as positive sentiment and tightening spreads across both high yield and investment grade supported a risk on environment in May
- In the US, risk assets rallied as volatility declined in both the Treasury and equity markets. Fixed income assets posted positive returns as rates moved lower and longer duration assets outperformed
- In Europe, while spreads outperformed, they were offset by higher interest rates, leading to underperformance compared to the US. In May, the trend was driven by generally softer-than-expected US economic data and stronger European data including stickier-than-expected inflation reports
- EM (Emerging Market) debt generated positive returns with corporates outperforming their sovereign counterparts given the weakness in the sovereign high yield universe, particularly in Ecuador and Argentina
US
In the US, risk assets rallied in May as volatility declined in both the Treasury and equity markets. Fixed income assets posted positive returns as rates moved lower and longer duration assets outperformed; investment grade outperformed high yield this month given the duration bias of the higher quality asset class, while high yield outperformed syndicated loans since the latter are floating rate and therefore exposed to very little interest rate duration. The US government curve bull steepened (benefitting exposure at the long end of the curve) and outperformed its European government peers as a string of sticky inflationary data forced investors to pare back the speed of policy normalization from the European Central Bank and the Bank of England.
EUROPE
In Europe, credit markets generated mostly positive returns as constructive sentiment and tightening spreads across both high yield and investment grade supported a risk on environment in May. While spreads outperformed this month, they were offset by higher interest rates in Europe, leading to underperformance compared to the US. The outperformance of US rates stood in sharp reversal to the previous month; in April, European rates outperformed as the Federal Reserve pushed back on rate cuts while the European Central Bank confirmed market expectations of a cut in June. In May, the trend was driven by generally softer-than-expected US economic data and stronger European data including stickier-than-expected inflation reports at the close of the month.
EM
Emerging Market (EM) debt generated positive returns this month as risk assets rallied. EM corporates outperformed their sovereign counterparts given the weakness in the sovereign high yield universe, particularly in Ecuador and Argentina. Within corporate credit, high yield outperformed investment grade on the back of robust performance from Asia, led by China which benefitted from the country’s latest policy initiatives, strong coupon, and spread tightening. This month, Chinese authorities announced a new set of measures to address oversupply in the property market, signaling progress following April’s Politburo meeting and ahead of July’s Third Plenum. Latin America generated strong performance led by longer dated Brazilian securities.
OUTLOOK
Primary markets remained active for both investment grade and high yield this month. Within high yield, most of the new issuance was the refinancing of existing debt; there is no technical pressure on the market despite the robust calendar. We have a sense that issuers who may have previously held off on issuing debt are now taking the opportunity to seize the moment with spreads close to year-to-date low levels. We have also seen a resurgence of longer-dated issuance (particularly in Europe); perhaps another indication that issuers do not expect rates to settle significantly lower than current levels.
Past performance is not a reliable indicator of current or future performance.
Muzinich views and opinions are for illustrative purposes only and not to be construed as investment advice.
This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of March 2024 and may change without notice.