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April 2021 | Issue 233
Technicals support IG while investors hunt for rising stars
Sayed Kadiri headshot
Sayed Kadiri
Investment grade credit spreads have been stubbornly tight for the past six-months, but investors see positive technical factors that make lower-rated bonds appealing. This comes despite inflation fears in the US, with 10-year US treasuries shooting up from less than 1% at the start of the year to 1.73%.
“The rate sell-off has only made IG more attractive,” says Alexandra Wilson-Elizondo, senior credit portfolio manager at MacKay Shields in New York. “There is supply-driven pressure in the rates market, but we maintain that there are structural deflationary factors which will keep rates stable in the near-term and that higher all-in yields will bring in foreign investors. From a fundamental perspective, credit is in a good spot because consumers and issuers have a lot of liquidity.”
Pimco’s head of European credit, Eve Tournier, says technicals are also boosting IG credit in Europe. “The European Central Bank has been purchasing approximately €7 billion of IG corporate bonds a month, absorbing nearly 50% of net supply and providing powerful technical support to the market,” she says.
“The European Central Bank is providing powerful technical support”
Eve Tournier, Head of European credit | Pimco
CDX NA IG is trading at 56.21 basis points as Creditflux goes to press, which is at the upper end of its range since 5 November (the floor has been roughly 50bp). In contrast, CDX NA HY is trading at 314.57bp, which is much tighter than its 362.62bp print on 5 November. A similar trend has been at play in European IG/HY.
Wilson-Elizondo says there will be a clearer distinction between high and low rated investment grade borrowers’ financial policies this year.
Whereas 2020 was about long duration high quality bonds, the value has been shifting towards triple B and double B credits, which will focus on de-leveraging.
“We see a lot of rising stars,” she says. “In the double B space you can gain 100-150bp in spread with very little additional balance sheet risk.”
That view is echoed by Pimco’s Tournier in Europe.
“There are going to be opportunities in picking rising stars as earnings recover and leverage declines,” she says. “We are already seeing rating agencies begin to reverse some of the downgrades they made when the outlook was bleak in late Q1 and Q2 2020. One needs to focus on bottom-up security selection and active management to still find value.”
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Global credit funds & CLO's
April 2021
| Issue 233
Published in London & New York.
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