Credit Market Highlights from Western Asset Management’s First Portfolio Manager Exchange Webcast

by | Nov 19, 2021

Asset manager comments on rising interest rates, valuations, M&A, ESG trends and more.

Western Asset Management hosted its first Portfolio Manager Exchange webcast today with insights covering the state of credit markets around the world. The webcast, titled “Credit Markets: No Time to Die – Stability in the Face of Macro Threats,” was moderated by Michael Buchanan, Deputy Chief Investment Officer of Western Asset. The panelists discussed the current market environment, the U.S. Federal Reserve, the European Central Bank, sector outlooks and a wide range of other topics.

The panelists included:

  • Annabel Rudebeck, Head of Non-U.S. Credit.
  • Walter Kilcullen, Head of U.S. High Yield,
  • Ryan Kohan, Head of Bank Loans, and


Celebrating 50 years, Western Asset has invested exclusively in fixed income using a consistent philosophy and process since 1971. Today, it manages more than $491 billion for institutions and individuals on six continents. Western Asset is a specialist investment manager of Franklin Templeton.

Commenting on the unwinding of quantitative easing (QE), valuations, M&A and ESG, Annabel Rudebeck, Head of Non-U.S. Credit, said:  

“The question of unwinding quantitative easing (QE) has arisen as taper is being discussed actively in the U.S. The European Central Bank (ECB), however, has committed to not cutting purchases until ‘shortly before we raise rates,’ so that is probably late next year at the very earliest, with the possibility of waiting until 2023. The ECB will continue to reinvest coupons and principal beyond that date, so stock volumes will remain constant for some time further. Unlike the U.S. Federal Reserve, the ECB has been a huge buyer of corporate bonds and a great source of liquidity operating in both the primary and secondary markets.

“On valuations in investment-grade credit, the room for error shrinks, and the cost of getting a name wrong gets higher as we don’t have the carry offset. However, if the demand wave for investment-grade credit continues, and if new-issuance supply does not overwhelm, there is no reason that credit cannot tighten.

“As far as company fundamentals, the focus of the last 18 months was on liquidity and shoring up balance sheets, but that may be starting to change. Cheap funding in public credit markets and private equity and infrastructure funds may present many varied outcomes for bondholders. Of course, institutional-grade investors dread LBOs, but even here, the leverage and credit quality can vary. As we think about the dangers here, we do not just focus on the sectors and issuers but also very much on the specific bonds.

“At this point, we see bank earnings continue to benefit from the benign environment, low loan losses, strong investment banking revenues, resilient interest income and ongoing efforts to manage costs. We like subordinated debt for the fundamental story and selective additional tier one, or AT1, bonds. The iBoxx Contingent Convertible Liquid Developed Europe AT1 Index, commonly called the CoCo Index, is almost 6% higher year to date, and we think the AT1 asset class is mis-rated.

“We are working with clients as they aim to solve for ESG issues, and fortunately, we are seeing that data and reporting on the use of bond proceeds are improving considerably in this space. We value engagement with our bond issuers, but we are also seeing it become less frequent in some cases as companies react to bondholder demands and become more proactive in delivering  information on ESG.”

Commenting on rising interest rates, valuations and environmental, social and governance (ESG) trends, Walter Kilcullen, Head of U.S. High Yield, said: 

“Historically, the high yield market has absorbed gradually rising rates. If Treasury yields move higher because of improving growth and the prospect for continued growth, that bodes well for credit product and risk. Short duration high yield carries one- to three-year durations, on average, and tends not to trade with 10-year rates with durations of more than seven years. Long maturity eight- to 10-year BB rated issue selection will be key in such a scenario.

“As far as valuations, yields are near historical lows for U.S. high yield. Spreads are well above the historical average, currently at +290 basis points (bps). To better understand this, consider the makeup of the asset class today: we have 54% BB rated and less than 12% CCC rated credit in the marketplace. Overall, credit metrics and fundamentals for high yield appear to be very strong when we look at leverage, interest coverage, sustained margins, and free cash flow to debt ratios. Default rates are well below the historical average and trending below 2% coming out of the global pandemic.

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