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Fixed Income
The second quarter of 2023 saw some calm return to financial markets following the eventful start to the year caused by the problems in the banking sector. A key theme for markets during the quarter was the resolution of US debt-ceiling negotiations, although other risks remain, including the potential impact of interest rates being higher for longer, concerns over the health of the commercial real estate sector and fears of a global recession.
While corporate fundamentals have seen some deterioration, they remain robust. Investment-grade corporate credit spreads tightened over the quarter, buoyed by the resolution of the US debt-ceiling impasse and the notable economic resilience of key economies.
Financials continue to trade on wider credit spreads given lingering concerns around the sector’s health following the banking issues earlier this year: this is despite the authorities’ decisive action and resolution of the crisis. These concerns are likely to remain and have led to dispersion within the sector. The banking sector makes up a significant proportion of the corporate investment-grade universe and this dispersion creates several opportunities for bottom-up credit selection, with larger systemically important banks likely to fare better amidst the uncertainty. Following the repricing in the sector, we see opportunities in the sector as, in our view, fundamentals remain strong, and valuations have become more attractive.
Leading economic indicators point to a weakening in the global economy in the second half of the year, but central banks are unlikely to pivot to more accommodative policy given inflation remains elevated and above target. While the second half of the year is likely to be filled with a number of uncertainties, investment-grade corporates continue to offer attractive yields and abundant levels of liquidity. These yield levels can provide investors with a buffer against near-term volatility and the asset class continues to offer an attractive entry for the long-term investor looking at total returns.
Financials continue to trade on wider credit spreads
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As at 30 June 2023. Index: Bloomberg Global Aggregate Corporate Index and Bloomberg Global Aggregate Corporate Index excluding financials. Source: Bloomberg
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