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Credit back to school and keen to earn

Key points:

  • Returns in developed market credit rebounded over the summer, driven by spreads in July and then by rates in August.
  • Default valuations are positive again for the first time in four years in the US and for the first time in two years in Europe.
  • The Italian budget outcome is likely to dictate euro credit performance into the year end.
  • A mean reversion analysis on US credit suggests that the next spread peak should be no higher than in early 2016.

Returns improve over the holiday

Returns in developed market credit rebounded over the summer, driven by spreads in July and subsequently by rates in August. The bounce was stronger in high yield than in investment grade - and also stronger in the US than in Europe. (Exhibit 1) This has left US dollar high yield and sterling high yield with positive year-to-date return – above government bond performance, which in turn are ahead of investment grade (Exhibit 2). Such a pattern is rather typical at this point in the business cycle, when rates are rising as monetary policy is being normalised. The one exception is euro high yield, as it has been impacted by euro zone risk aversion, which in turn was triggered by political uncertainty Italy, and as a result, has lagged German Bund returns.


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