After the shock that credit suffered in 2022, it has registered two positive years in terms of yield, what can investors expect in the new scenario of falling rates?
POINTS TO REMEMBER:
- What can we expect from the fall in interest rates?
- What are the investment opportunities?
- Short-term or long-term?
- Should we favour credit or debt?
Falling rates typically create a positive environment for credit markets and are likely to be a key driver of performance going forward. In 2022 and 2023, spread compression was the primary contributor to returns, supported by improved fundamentals and strong inflows into the asset class. By the end of September, EUR High Yield (HY) spreads closed at 342 bps (below the 10-year average of 404), while USD HY spreads closed at 303 bps (vs 439). (source: Bloomberg) A similar picture was seen in investment grade (IG)
For the rest of 2024 and into 2025, the main performance contributors will shift to carry and duration. Current yields of 5.7% for EUR HY and 5.5% for USD HY (net of hedging costs) are well above the 10-year average, making them attractive in the current risk environment. These yield levels provide a cushion against potential spread widening. In a falling rate scenario, bonds with longer duration will see an additional benefit to performance.
Finally, default rates in high yield are expected to remain stable due to resilient macro conditions and the fact that many companies have already refinanced their near-term debt maturities.
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