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Quarterly market review from Ninety One’s Developed Market Credit team.
Second quarter market review
In the US, an eventful second quarter for the US Treasury market resulted in the yield curve steepening: longer-dated bond yields rose in reflection of investor concerns over the outlook for public finances; while short-dated bond yields fell as softer economic data led some members of the Federal Reserve’s rate-setting committee to become more dovish.
In Europe, sovereign bond yields fell, particularly in shorter-dated bonds. Driving factors included a weaker growth outlook following Trump’s tariff announcements and falling inflation.
The global credit market had another strong quarter overall, with significant dispersion in returns again a feature. The high-yield corporate bond market was one of the top-performing segments, particularly in the US.
It benefited from tightening credit spreads following the ‘Liberation Day’ spike, as markets gained confidence from the pause in trade tariffs. European high-yield debt also benefited from a tightening of credit spreads.
The bank capital market (additional Tier 1 and Tier 2 instruments) also performed well, as a recovery in investor risk appetite helped spreads tighten further.
In the loans market, returns diverged between the US and Europe, with the former seeing more spread tightening than the latter.
The regional picture was more balanced in the investment-grade credit market: US and European markets were boosted by the fall in sovereign bond yields and slightly lower credit spreads.
A healthier appetite for risk was also in evidence in the collateralised loan obligation (CLO) market, where riskier (lower-rated) tranches outperformed, partly thanks to tightening credit spreads.
Where to focus and what to avoid
-Higher-carry (higher-income) holdings – such as structured credit (including agency mortgage-backed securities), loans, and selective parts of the short-duration high-yield and bank capital markets – offer an attractive income profile and favourable downside characteristics.
-In more traditional markets – such as US high-yield debt and US investment grade – credit spreads remain near the tightest (most expensive) levels seen over previous cycles; we see limited potential here for further price appreciation or attractive income.
-Our sector positioning favours areas such as utilities and financials, which are domestically oriented and therefore less likely to be impacted by trade tariffs.
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The above is an excerpt from Ninety One’s second quarter Credit Chronicle. For more details and information: see document attached.
Re-published with permission. Views expressed are not by association FNArena’s.
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