Muzinich Weekly Market Comment: In season

July 15, 2024

In our latest roundup of developments in financial markets and economies, we explain why the drivers of the recent rally in credit have been more nuanced than the usual seasonal factors.  

July has historically been a strong month for credit markets (see Chart of the week). Halfway through this month, the signs are that 2024 will be no exception.

July’s seasonal strength is often attributed to primary markets slowing down at the start of the summer period and Q2 black-out periods for issuers. In a positive-carry asset class, investors are perhaps also keen to be fully invested ahead of the quieter summer months.

Chart of the week: Average monthly credit returns, trailing 20 years

Past performance is not a reliable indicator of current or future results.

Source: ICE BofA Platform, as of June 30, 2024. ICE BofA ML US Corporate Index (C0A0), ICE BofA ML Euro Corporate Index (ER00), ICE BofA US Cash Pay High Yield Index (J0A0), ICE BofA ML Euro High Yield Index (HE00). Index performance is for illustrative purposes only. You cannot invest directly in the index. Indices selected provide best proxy for highlighting performance of US and European investment grade and high yield bonds. For illustrative purposes only.

Impasse in France

This year, however, the drivers of performance so far in July have been more nuanced.

Last weekend, the results of the second round of the French elections came as a surprise to many observers. The left-wing alliance took the largest number of seats — a significant improvement on its first-round showing — beating Marine Le Pen’s right-wing National Rally, which had been the clear leader after the first round.^[1]

These results point to political stalemate in France. Three quite different political groups with a similar percentage of seats, but none seemingly with a clear way to form a majority. The market rallied on this result. While French spreads have continued to lag, broader European investment-grade spreads were back close to their year-to-date tights, as of July 12.

There appears to be some relief among investors that the more extreme potential outcomes did not materialise. However, political uncertainty in France — the second largest economy in the Eurozone that also represents 21% of the European investment-grade market^[2] — has clearly risen. The rally, therefore, could be potentially overdone if driven by relief alone. In our view, the seasonal factors that have historically favoured credit markets in July have been at play again and we may see some of the ‘relief rally’ unwind in the second half of the month.

Not so hot

In the US, the hotly anticipated Consumer Price Index (CPI) number for June came in at 3%,^[3] the slowest pace for a year and lower than expected. US rates rallied, pulling other government bond curves along with them. At the time of writing, the overnight interest rate swap market was fully pricing in a Fed rate cut for September.^[4] Friday’s higher-than-expected Producer Price Index (PPI) number failed to deter the market, although the divergence between CPI and PPI will make a likely Personal Consumption Expenditures reading — the Federal Reserve’s preferred inflation gauge — difficult to infer.

The recent spate of weaker-than-expected economic data in the US has catalysed a changing narrative. Until the end of April, the Fed was in the ‘higher-for-longer’ interest rate camp and the market reluctantly followed its lead. However, since then, data has disappointed, cracks are starting to show in the labour market, inflation has generally trended lower, and the market is once again pulling rate cuts. For now, the momentum is for lower US rates, and this may well be the key driver of another strong July for credit.

Looking ahead, September has historically been one of the weakest months as the seasonal factors that benefit July typically unwind after the summer. Should the more optimistic narrative persist over the next couple of months, September will clearly be a test, as political uncertainty is likely to remain elevated and the Fed will be in the spotlight once again.

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References

[1] Le Monde, ‘2024 French elections: Map and chart of results,’ as of July 8, 2024
[2] ICE BofA Platform, as of July 12, 2024
[3] Bureau of Labor Statistics, as of July 11, 2024.
[4] Bloomberg, as of July 12, 2024

Past performance is not a reliable indicator of current or future results.

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 July 15, 2024, and may change without notice. All data figures are from Bloomberg, as of July 12, 2024, unless otherwise stated.

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