Fixed Income June 2017  

What has happened to spreads over 2016-2017?

This article is part of
Guide to finding yield globally

Al Jalso, senior portfolio manager at Russell Investments, notes: “Volatility has been predominantly political – UK referendum on the EU, the US and French presidential elections, issues related to President Trump’s administration and policy progress.  

“The trend tighter in spreads has been driven by fundamentals (modestly positive growth in the US, UK doing reasonably well despite Brexit, and EU posting improving economic data, corporate credit quality) as well as the ongoing positive technical of investors searching for yield in a persistently low rate environment.”

More stable?

So where might credit spreads go from here?

Spreads have been coming in since last year and there are some who believe spreads are not quite as compelling as they were.

Ben Willis, head of research at Whitechurch Securities, observes: “Credit spreads have been relatively more stable in 2017 as the inflationary outlook has been checked by geopolitical concerns, not least President Trump, Brexit and European elections.

“However, areas of attractive spreads can be still be found in certain sweet spots.”

He picks out BBB-rated bonds as generally offering the best spreads in terms of risk/liquidity premia, “while financials spreads, particularly bank paper, have remained at wider levels due to their complexity”.

There are other pockets of value to be found in other areas of the credit market too.

Ms Dysenchuk suggests credit spreads will continue to grind tighter throughout the remainder of 2017 and should help to absorb any potential interest rate rises, although it will not be the same level of credit tightening investors are used to seeing.

“In general, credit spreads tend to be maintained throughout monetary policy hiking cycles and don’t widen until recessionary periods,” she says. 

“Given that tendency and the strong macro and corporate health backdrop (solid growth, positive earnings releases, declining leverage) we do not expect significant credit spread widening in the near to medium-term.” 

On what to look out for during the rest of 2017, Ms Dysenchuk points out: “One of the key drivers/supporters of the spread tightening over the past year has been supportive flows, particularly on the investment grade credit and emerging markets debt side.

“This will be a key factor to monitor going forward, as any turn in investor demand could remove a catalyst for tighter spreads.”

eleanor.duncan@ft.com