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Credit’s demise has been greatly exaggerated

Key points:

  • Amongst risk assets, credit markets have continued to enjoy a positive backdrop – and we believe this looks set to persist in
  • the near term.
  • We expect lagging Euro Investment Grade spreads to catch up, in the wake of European Central Bank policy, stronger balance sheets and government bond curve dynamics.
  • The tightening in US lending standards has pushed US default forecasts higher – for now.

Credit’s strong rebound continues

Amongst risk assets, credit markets have continued to enjoy a positive backdrop – in January they registered strong, and in certain cases, record-breaking returns. Not for the first time in the past few quarters, US High Yield (HY) has led the pack. So far this year, it has posted a total return of 5.3% and regained the October 2018 watermark. Global HY has clocked in 4.5% over the same period and Global Investment Grade (IG) a very respectable 2%. US HY excess returns for January were the strongest since March 2016, as spreads have mirrored and exceeded the rebound in the oil price. We believe the positive backdrop for spreads looks set to persist near term, especially if a second US government shutdown is avoided, and if US-China trade talks do not get derailed. Equally, given the strength of the rally in certain markets, like US HY, some short-term consolidation should be expected.

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