Corporate Credit Snapshot - July 2024

July 5, 2024

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US

In the US, risk assets delivered positive returns across the board in June.  Economic data began to show signs of a slowdown in inflation and in the economy more broadly.  In particular, CPI (Consumer Price Index) and PPI (Producer Price Index) growth waned dramatically month-over-month, the jobs data was softer than expected, consumer spending and confidence weakened, and high mortgage rates pressured home sales.  Consequently, the yield curve shifted lower, and the market tilted more definitively towards pricing in two rate cuts in 2024.  As belief in the nearer-term likelihood of a soft-landing grew, returns were positive across most asset classes, with longer duration assets (i.e., equities and Treasurys) leading the way.  Within corporate fixed income, modest spread widening caused returns to lag Treasuries. Leveraged loans and CCC rated credit were the least positive performers due to heavy repricing activity and idiosyncratic credit concerns, respectively.

EUROPE

In Europe, credit markets generated mostly positive returns across the board in June.  Market moves in June were largely driven by political headlines in Europe, with French President Emmanuel Macron calling a snap election in response to the results of the European parliamentary elections.  Interest rates rallied in Europe and the US, while spreads simultaneously widened.  While across Europe, the move in rates initially overpowered the spread widening (resulting in longer duration credit outperforming earlier in the month), this outperformance was tempered as rates sold off later in the month when a French left-wing government looked less likely to materialize.  By the end of the month European credit had marginally outperformed the US in investment grade. This was primarily driven by the move lower in rates which more than offset the larger spread widening seen in Europe.  European high yield lagged for the month given its sensitivity to European headlines, but its shorter duration.  Primary markets were relatively quiet during this period of volatility, providing technical support for the markets; however, we expect issuance to resume in July before the summer break.

EM

Emerging Market (EM) debt generated positive returns this month, outperforming both its sovereign counterparts and developed market peers.  High yield slightly outperformed investment grade this month, due to its superior coupon. Within high yield, single B rated credit outperformed; the homebuilders/real estate sector in Asia delivered particularly strong performance as did the telecommunications sector in Latin America.  Within investment grade, EMEA (Europe, Middle East, and Africa) credit outperformed, driven by the region’s heavy energy exposure in a particularly strong month for energy.  At the close of the month, China finally announced that its highly anticipated Third Plenum meeting will be held between 15th and 18th July; the meeting has previously been used to announce transformative economic reforms.

OUTLOOK

With generally positive economic growth, stable to lower rate expectations, low default rates and positive flows, the outlook for corporate credit remains sound.  Supply (which was somewhat lower in June than in recent months) continues to be easily absorbed, particularly with much of it going towards refinancing activity.  Spreads remain near historical tights, but high all-in yields continue to captivate investors in the absence of major shocks.  We believe spread movements in some pockets this past month may offer good opportunities. With disinflation taking hold, fixed income markets may be pivoting to duration leadership in certain markets.  That said, we are mindful of rising geopolitical uncertainties (as the election-related events in Europe and the United States in recent weeks have shown), which could change current trends and/or increase risk premia. 

 

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 June 2024 and may change without notice.

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