Corporate Credit Snapshot - December 2024

December 9, 2024

Please click here to download the full report.

US

In the US, corporate credit gained after the highly anticipated presidential election.  The softness that we saw in October reversed in November; spreads tightened, and rates moved lower. US high yield benefitted from risk-on sentiment with performance led by lower-rated paper.  US Treasury yields fell more at the longer end than at the front end; a trend typically observed when markets perceive that near term central bank rate cuts are already fully priced in. While markets still expect the Federal Reserve to cut rates, expectations seem to have been significantly revised to a higher neutral policy rate factoring in the new administration’s policy agenda.  Ahead of the Federal Open Market Committee meeting in mid-December, investors will be closely watching payroll numbers and inflation data while trying to gauge future potential rate cuts.

EUROPE

In Europe, credit markets delivered positive returns in November.  Following the US elections and the likely focus of the incoming administration on pro-growth policies, fiscal expansion, and protective trade measures, US and European risk appetites diverged with spreads grinding notably tighter in the US—particularly in high yield—while moving wider in Europe.  We also saw divergence in the rates market, with the yield on the German 10-year falling about 30 basis points as the market moved to price more rate cuts from the European Central Bank in response to a weaker economic outlook. In the US, Treasury yields fell by a much smaller margin.  Political uncertainty in Europe weighed on investor confidence, with the German governing coalition collapsing in early November and investors anticipating a potential French no-confidence vote in December.  Q3 earnings, largely completed in November, also showed notably weaker earnings in Europe (particularly in the underperforming automotive sector) than in the US.  Credit markets continue to function well with open primary markets and inflows into the asset class.  However, we note that investor caution (potentially exacerbated by the time of year) has been rising in Europe, with investors becoming more selective.

EM

Emerging Market (EM) debt gained on tightening spreads driven by positive sentiment surrounding the US presidential election.  Government bond yields moved lower globally, creating a favorable environment for EM assets as investors sought higher yields in a declining rate environment.  Sovereign debt outperformed corporate credit this month, benefitting from a barbell structure including high-quality long-duration bonds and distressed short-term debt which thrived in the supportive market conditions.  Within the corporate space, lower-rated bonds—particularly Ukrainian securities in Eastern Europe—led performance. On a sector level, the telecommunications sector in Latin America posted notable outperformance. Among EM investment grade debt, single-A rated bonds outperformed—primarily due to their longer duration which benefitted from the falling yield environment.

OUTLOOK

As the world watches and waits for what will happen in the US when president-elect Trump assumes office in January, it is worth noting that the administration will inherit a significantly different US economy than when it was last in power. Unemployment is low, and sticky inflation poses a greater concern than deflation.  Economic growth is losing momentum, and global trade activity remains relatively weak. With debt levels significantly higher and savings rates lower, there seems little room for major tax cuts. Additionally, valuations in both equity and credit markets look stretched, but we expect continued strong demand for risk assets to support those valuations.  It is possible that executing policy will prove far more challenging than discussing it, potentially exposing the world to greater tail risks.

 

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 December 2024 and may change without notice.

--------

Important Information

Muzinich and/or Muzinich & Co. referenced herein is defined as Muzinich & Co., Inc. and its affiliates. Muzinich views and opinions. This material has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested. Rates of exchange may cause the value of investments to rise or fall. Emerging Markets may be more risky than more developed markets for a variety of reasons, including but not limited to, increased political, social and economic instability; heightened pricing volatility and reduced market liquidity.

Any research in this document has been obtained and may have been acted on by Muzinich for its own purpose. The results of such research are being made available for information purposes and no assurances are made as to their accuracy. Opinions and statements of financial market trends that are based on market conditions constitute our judgment and this judgment may prove to be wrong. The views and opinions expressed should not be construed as an offer to buy or sell or invitation to engage in any investment activity, they are for information purposes only.

This discussion material contains forward-looking statements, which give current expectations of a fund’s future activities and future performance. Any or all forward-looking statements in this material may turn out to be incorrect. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Although the assumptions underlying the forward-looking statements contained herein are believed to be reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurances that the forward-looking statements included in this discussion material will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation that the objectives and plans discussed herein will be achieved. Further, no person undertakes any obligation to revise such forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

United States: This material is for Institutional Investor use only – not for retail distribution. Muzinich & Co., Inc. is a registered investment adviser with the Securities and Exchange Commission (SEC). Muzinich & Co., Inc.’s being a Registered Investment Adviser with the SEC in no way shall imply a certain level of skill or training or any authorization or approval by the SEC.

Issued in the European Union by Muzinich & Co. (Ireland) Limited, which is authorized and regulated by the Central Bank of Ireland. Registered in Ireland, Company Registration No. 307511. Registered address: 32 Molesworth Street, Dublin 2, D02 Y512, Ireland. Issued in Switzerland by Muzinich & Co. (Switzerland) AG. Registered in Switzerland No. CHE-389.422.108. Registered address: Tödistrasse 5, 8002 Zurich, Switzerland. Issued in Singapore and Hong Kong by Muzinich & Co. (Singapore) Pte. Limited, which is licensed and regulated by the Monetary Authority of Singapore. Registered in Singapore No. 201624477K. Registered address: 6 Battery Road, #26-05, Singapore, 049909. Issued in all other jurisdictions (excluding the U.S.) by Muzinich & Co. Limited. which is authorized and regulated by the Financial Conduct Authority. Registered in England and Wales No. 3852444. Registered address: 8 Hanover Street, London W1S 1YQ, United Kingdom.