However, Hermes Investment Management co-head of credit Fraser Lundie notes US fixed income has struggled. “Partly that is interest rate related, partly due to the dollar strength and partly that the US credit market is more exposed to the commodity markets, particularly oil companies.”
As a result he points out the future direction of US credit markets is intertwined with oil and commodities. With companies in this space under more stress as the price of oil plummets, they are offering a higher yield but also more volatility.
Erick Muller, head of markets and products strategy at Muzinich & Co, adds: “If you take the high-yield energy sector, the spread almost doubled from the beginning of 2015 – from around 769 bps at the end of December 2014 to 1,370 bps a year later.
“This compares with an increase of just 25 per cent or so for a High Yield US dollar ex energy index in the same period. The price of nearly everything linked to commodities was driven lower.”
Looking ahead, Mr Lundie adds that while overall valuation levels are looking quite attractive, “we are going to see an increase in default rates from here, particularly in the US and in energy companies, and that will take some of the gloss off the overall yields at the index level”.
Nyree Stewart is features editor at Investment Adviser
Quality of US credit
Another interesting feature of US credit in 2015 was the differentiation in performance by credit rating.
Erick Muller, head of markets and products strategy at Muzinich & Co, notes: “Poor-quality CCC debt underperformed good-quality debt. Markets don’t always respect the hierarchy of credit – you often see poor-quality debt being bought in rallies because it’s undervalued. In October’s rally we saw the CCC [debt] lagging BB. Arguably that’s evidence of good judgement and we might find that reassuring.”
Hermes Investment Management co-head of credit Fraser Lundie says there are questions over the liquidity of low-quality credit. As a result he highlights opportunities in “out-of-consensus” sectors like basic industry, as these have shown more conservative balance sheet behaviour such as refraining from excess dividends or dividend increases, or debt-financed mergers and acquisitions.
