The third quarter issue of Schroders Credit Lens examines the lower dispersion in the high yield bond market, the strong demand for US corporate bonds from overseas investors, and the worrying resurgence of leveraged buyout activity.
Links to all three versions of the Credit Lens can be found here and at the end of the article.
- Bond spreads continue to narrow. The dispersion in the bond sector has decreased to 2007 levels in some markets. Valuations are unattractive by historical standards, both for investment grade and high yield bonds. Due to the improved creditworthiness over time, there is a little more leeway for further shrinking spreads in the high-interest segment
- Rating agencies are currently upgrading issuers that issue large volumes. Upgrading phases of the net ratings by rating agencies have in the past been associated with stable or narrower spreads.
- On average, companies are reducing their debt burdens, supported by significant earnings growth. Many companies have succeeded in reducing their interest bills by refinancing existing, higher-yielding bonds
- The issue volume remained high in 2021 despite the large amount of cash available. Very low nominal and negative real corporate bond yields encourage issues with little apparent need for additional cash. Demand from defined benefit pension funds could help process the additional emissions quickly
- More worrying, however, is the significant increase in leveraged buyout deals (LBO) in the US in the recent past. This could lead to a noticeable decline in the quality of US high-yield bonds
- Foreign demand for US corporate bonds remains strong as the currency hedged yields in US dollars are attractive
- In emerging market bonds, local currency bonds and emerging market currencies have largely rebounded from the sell-off at the beginning of the year. One reason for this was the stability of US bond yields and rate hikes by emerging market central banks
Background information on the Schroders Credit Lens:
The Schroders Credit Lens is a comprehensive quarterly review of the global bond market.
It contains all the important data and information on investment grade bonds (IG) and high yield bonds (HY) in US dollars, euros and pounds sterling, as well as on emerging market bonds (EMD) in local and hard currency and corporate bonds from emerging countries.
Schroders Credit Lense checks each area independently. This should be of particular interest to investors who make or advise on asset allocation decisions.
The corporate bond (investment grade and high yield) section includes an in-depth analysis of valuations, fundamentals, and technicals. The section on emerging market bonds also covers some special features of this market. For example, the subdivision into investment grade and high yield bonds for emerging market bonds in hard currency and the attractiveness of real yields and emerging market currencies for emerging market bonds in local currency.
Many investors hedge currency risk when they invest in bond markets abroad. For this reason we are publishing three versions, each from the perspective of an investor investing in pounds sterling, US dollars and euros.
We hope you find this publication useful. We look forward to feedback.
All three versions of the Credit Lens can be downloaded here:
The views and opinions expressed herein are from the authors and do not necessarily represent those expressed or listed in other communications, strategies, or funds from Schroders or other market participants. These are subject to change.