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Global Corporates: Increased dispersion in credit spreads brings opportunities for active managers
Concerns about the potential for another financial crisis have led to a volatile start to the year. The collapse of SVB Financial in the US, followed by the downfall of Credit Suisse and its emergency acquisition by UBS, created turmoil for the broader markets. Bondholders have also had to contend with the surprise wipe out of Credit Suisse Additional Tier 1 bonds. Alongside this, central banks have continued to battle elevated inflation rates with further rate hikes, and recession risks have increased.
Global investment-grade markets started the year well, delivering positive returns despite these early challenges. Credit fundamentals show companies to be in pretty good shape overall. Many have been managing their balance sheets conservatively and have good levels of cash. In addition, despite the rise in rates over the past year, interest rate coverage ratios remain relatively healthy owing to the fixed-rate structure and long maturity of companies’ liabilities. That said, the absolute level of net leverage remains high, and it is likely that fundamentals have peaked. We should expect credit metrics to weaken in the coming months as the macro environment becomes more challenging and corporate earnings fall. Downgrades may increase as a result.
We are seeing an increase in dispersion within credit spreads, with the range of spreads within the market expanding. In our view, this rise in dispersion reflects an increased divergence in credit risk by issuer. As the macroeconomic environment evolves and fundamentals become increasingly important, we would expect this dispersion to increase. We welcome this development: as an active manager we are able to deploy our extensive resources to help identify any securities that may have become mispriced and so exploit the dispersion.
Outright yields across the investment-grade sector are still high, however, for the long-term investor looking at total returns, investment-grade corporate bonds may currently provide an attractive entry point that could absorb near-term volatility if held for a long-term horizon.
Global investment-grade yields remain elevated
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Data as at 31 March 2023. Index: Bloomberg Global Aggregate Corporate Index. Source: Bloomberg
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