Corporate Credit Snapshot - November 2024

November 7, 2024

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US

In the US, asset values declined across the board given the dramatic rise in Treasury yields.  Treasury rates finished 26-60bps (basis points) higher across the 1s-30s curve (which shows the difference in yields between 1-year and 30-year US Treasury instruments) on the back of resilient macroeconomic data and concerns around inflationary policies associated with both presidential candidates ahead of the US elections.  Within corporate credit, the environment remained supportive for risk taking, enabling high yield and broadly syndicated loans to outperform higher rated fixed income as wider credit spreads cushioned rising Treasury yields.

EUROPE

In Europe, credit markets were mixed.  October saw a sharp reversal in the recent interest rate rally, with rates finishing higher in both the US and Europe on the back of resilient macroeconomic data—particularly in the US—and concerns around inflationary policies ahead of the US elections.  This month, the European Central Bank (ECB) cut rates for the third time this cycle; ECB President Christine Lagarde reiterated the ECB’s expectation that Europe will avoid a recession, her messaging further supporting higher rates in Europe.  Rate curves continue to re-steepen as rate cuts materialize and recession fears fade.  Rates in the UK also moved notably higher because the UK government’s budget at month-end was generally viewed as inflationary, with spending funded by increased Gilt issuance.  Spreads were tighter on the month, with investment grade markets in both the US and Europe reaching new year-to-date tights.  On the investment grade side, European spreads outperformed, as investors searched for higher yields. Consequently, we saw the recent European spread premium (versus the US) compressing by almost 10bps (basis points) in investment grade, despite concerns around the European economy.

EM

Emerging Market (EM) debt declined this month on the back of rising government yields. The catalyst was robust activity data, political uncertainty in the US, and the expected removal of austere policy in many markets.  However, the environment remained supportive for risk taking, enabling high yield (HY) to outperform, and credit spreads to outperform government bonds. Within EM HY, single B rated credit generated a positive total return in October due particularly to performance of distressed Chinese property bonds, Ukrainian corporate paper, and Latin American cable operator debt.  In the USD denominated space, BBB rated credit outperformed single-A rated credit.  By region, Asia outperformed across both HY and investment grade markets.  This month we saw both Asian and Eastern European property credits continue to recover in price, responding to several central bank policy-loosening announcements.

OUTLOOK

As of month-end, reported Q3 earnings have been mixed globally, with weakness mostly seen in cyclical sectors including automotives and luxury goods. We have, however, seen some weakness in less cyclical issuers, raising questions about the health of the consumer, particularly in Europe.  At the same time, corporate credit continues to see strong inflows across both investment grade and high yield, with primary issuance easily absorbed and bonds becoming harder to source.

 

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