Ninety One’s Developed Market Credit team provides their latest view on the credit market, with a focus on the ‘greening’ of the credit market.
Jeff Boswell, Head of Alternative Credit at Ninety One comments:
“A combination of mainly robust economic data in the US and rising confidence among US and European consumers and businesses boosted market sentiment in what was a positive quarter for most financial markets. One of the stories of the quarter was the fall in government bond yields and correspondent rise in prices, which was in complete contrast to the “reflation” sell-off in the first quarter. While the US Federal Reserve (Fed) has generally maintained its supportive narrative and its desire to strike a balance between job market health and inflation, we saw a slightly more hawkish tilt in June, whereby indications of the timeframe for raising rates were brought forward. Somewhat perplexingly, although US Treasuries initially sold off on this news, they subsequently rallied – seemingly due to concerns over the rapidly spreading Delta variant of COVID as well as a perceived abatement in inflationary pressures.
“Given this supportive market backdrop, both the global high-yield and global investment-grade (IG) markets produced positive returns, of 2.4% and 2.5% respectively. High-yield bonds continued to benefit from strong demand as investors hunted for yield, while IG markets rebounded from the first quarter as both credit spreads and risk-free rates declined, particularly in the US. Elsewhere, the loans market lagged high-yield bonds due to the floating rate nature of the assets in a quarter when government bonds rallied. In terms of issuance, the high-yield market saw a record half year, with volumes up 50% on last year. Loan issuance across the US and Europe also remained strong, although the US saw some comparative respite from the exceptional issuance levels of the first quarter.
“The year is also proving to be a watershed for credit markets in terms of Green and Sustainability-Linked Bonds (SLB), with issuance surging across both investment-grade and high-yield markets and spanning both sides of the Atlantic. We believe this trend is only likely to continue, as a growing number of corporate issuers accelerate their sustainability agendas, and accordingly look to optimise their capital structures and cost of capital. While there is a current lack of uniformity in the underlying documentation of these Green bonds, further evolution will hopefully see an improvement in the standardisation of ESG bonds, as both corporates and investors become more familiar with the underlying instruments. In our opinion, there is a lot more green to come, but hopefully fewer ‘shades’.”