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Credit Market Outlook: Q4 2020

Where to From Here?

Most credit markets have largely recovered from the COVID-19-induced market disruption and liquidity issues that forced central banks into interventionist mode. Some pockets of the corporate bond market, particularly those severely impacted by the pandemic, remain under pressure. Elsewhere, US corporates have been on a borrowing binge, with a record $2 trillion in issuance so far this year, and with most of the final quarter still ahead.

This selection of papers examines the outlook for credit markets, particularly in the light of the recent move by the U.S. Federal Reserve to shift its policy stance on inflation. A range of topics are covered, including the prospects for numerous bond types and the implications for bonds should the Fed manage to conjure up some inflation.

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FEATURED PAPERS


Is Higher Global Inflation Around the Corner? (PGIM Fixed Income, Sep 2020)

PGIM Fixed Income notes the surge in monetary and fiscal stimulus since the COVID-19 pandemic set in, though they suggest that investor concerns about an upturn in inflation are unwarranted.

Fallen Angels in Focus (MetLife IM, Aug 2020)

MetLife IM's paper focuses upon recent events in the credit market. The authors then hone in on the fallen angel secton of the market, where they explore those sectors most likely to be impacted, while offering opinions on valuations.

The Role of Secure Income Assets Post-COVID-19 (LGIM, Sep 2020)

For compliance reasons, this paper is NOT accessible in the United States and Canada

LGIM argues that one of the possible results of the COVID-19 pandemic could be the disintermediation of the banking sector as the primary source of company funding. They see the private credit markets as a likely alternative source for much-needed capital, with the role of defined benefit (DB) schemes likely to increase.

Economic Outlook: Will the debt matter? (Federated Hermes, Sep 2020)

For compliance reasons, this paper is only accessible in certain geographies

Neil Williams, Senior Economic Adviser to the International Business of Federated Hermes, argues that the mountain of issuance that many governments have already thrown at the COVID-19 pandemic may adversely impinge upon monetary and other policy levers down the track.


CREDIT MARKET OUTLOOK AND INSIGHTS


Q4 Fixed Income Macro Outlook: The autumn cluster (Robeco, Oct 2020)

Robeco observes that several major events are due in the final quarter, each of which could potentially have a high-impact value upon markets. They remain flexible and nimble, with a high-quality bias, but feel that most credit markets have already benefited from what may be an unwarranted rebound.

Election Stirs Market Volatility (PineBridge Investments, Oct 2020)

PineBridge Investments notes that in their opinion, most credit markets appear at or close to fair value. Supply and demand will become more important as spreads tighten on central bank support.

Q4 Fixed Income Outlook (PGIM Fixed Income, 2020)

PGIM Fixed Income notes that the shorter-term outlook for the credit markets appears opaquer than the long term, where investor demand for yield and improving credit fundamentals should drive returns

Macro Quarterly: Q4 2020 (UBS AM)

UBS AM highlights the impairments to economic recovery brought on by continuing and 'second wave' effects of the COVID-19 outbreak, countered by significant fiscal and monetary responses. Longer term, they are more optimistic, envisaging a broadening recovery once a vaccine is produced and dosing implemented.

Municipal Bonds: 2021 U.S. States Outlook (Northern Trust AM)

Northern Trust AM's Municipal Bond Outlook piece notes the late revisions to state budgets and thinks that further refinements and stimulus may be required. That said, they believe that states will continue to meet their obligations, as they have some contingency built into budgets.

Secured Loans Update: All loans are not equal (Janus Henderson blog, Sep 2020)

Janus Henderson Portfolio Manager and secured loans specialist, Elissa Johnson, outlines her perspective on U.S. and European loan markets, highlighting how each market suggests different prospects.

Video: What's next for high yield? (MFS, Sep 2020)

In this video, MFS High Yield portfolio manager David Cole outlines his perspectives on how recent machinations have affected the credit cycle and highlights some of the risks and opportunities that have arisen.

Technicals Shine for Loans and High Yield (PineBridge Investments blog, Sep 2020)

In their Leveraged Finance piece, PineBridge Investments note a market dominated by technical factors, but one where spreads could continue to move higher, given an ongoing demand for yield and central bank support.

Credit Market Recovery? Take a Closer Look (Wellington Management, Oct 2020)

In their assessment of the credit markets, Wellington Management focus upon flexible alternative strategies. They note that while at a headline level the market gives the appearance of having broadly recovered, specific sectors remain out of favour, which gives the nimble and astute investor scope to exploit opportunities.

Agency MBS in the Age of the Fed (TCW, Sep 2020)

In this recent piece, TCW wonders whether agency MBS investors should 'follow the Fed' and go 'all-in' or whether a degree of caution should be warranted.

Giving Credit to China (Invesco, Oct 2020)

For compliance reasons, this paper is only accessible in certain geographies

Invesco updates an earlier paper on China's credit growth amongst the shadow banking sector, noting that while the significance of the sector needs to be considered, there remain reasons to be cautiously optimistic.

Fed’s Shift May Spell Long-Term Trouble for Bonds (Aviva Investors, Sep 2020)

For compliance reasons, this paper is only accessible in certain geographies

Aviva Investors' paper suggests that so far, bond markets have responded sanguinely to the Fed's change to its policy framework, assuming that interest rates will be lower for longer. However, if the Fed manages to engineer some inflation into the system, things may look very different.

GCC/MENA Bond Market Update (Franklin Templeton, Sep 2020)

For compliance reasons, this paper is only accessible in the EMEA region

In this regularly updated paper, Franklin Templeton offers insights and updates into the investment and bond markets of the region