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Credit where credit is due

May 21, 2020

Anando Maitra, PhD, CFA

Head of Systematic Research and Portfolio Manager

Ashton Parker

Head of Credit Research

Jamie Salt, CFA

Systematic Fixed Income Analyst and Portfolio Manager

Corporate credit markets today present highly compelling prospects for investors.

The market has sold off across sectors in an indiscriminate grab-for-cash that has uncoupled valuations from fundamentals. While defaults are expected to be substantially higher in the wake of the sudden economic shutdown, we believe unprecedented government support should help mitigate defaults, especially in better quality high yield where the Federal Reserve is now acting as a backstop.

Credit spreads have generally overestimated default risk in the past, and we find that even at these stress default levels, credit spreads more than compensate for defaults within standard bond indices.

Long-term investors able to look beyond the current situation could select mispriced names that retain robust fundamentals, meeting higher yield targets in the process.

What are the opportunities?

Opportunities at the time of writing include crossover credit, Swiss credit and convertible bonds.

Pricing in the BBB to BB crossover segment reflects strong value in global credit, in our opinion. We see the greater supply of fallen angels presenting prospects because fallen angels tend to outperform peers once downgraded – this process could play out faster in today’s market because central bank purchases are occurring in this bucket.

The return to widespread positive yield for Swiss credit marks a phenomenon not seen in years. At end-February, roughly 94% of the SBI index (AAA-BBB) was negative yielding. As of end-March, however, 63% of the SBI index offered positive yield.

Parts of the global convertible bond market are now behaving like bonds, except they are offering higher yields than straight credit with the same seniority and from the same issuer, all whilst including an equity option.

There are clear openings in credit markets for specialised, active managers to deliver alpha, while long-term investors could finally resolve the low yield conundrum of recent years.

important information.

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