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A test of endurance: 360°, Q3 2021

What is our current view of fixed income markets? And where do we see the best relative value? In our latest edition of 360°, Andrew ‘Jacko’ Jackson, Head of Fixed Income, and his team of specialist investors consider the areas that have the potential to deliver superior risk-adjusted returns.

Le Tour de France is my favourite sporting event of the year for many reasons. The landscapes and scenery are spectacular. Then there are the tactics, the subtleties of the scoring systems, the roles of the individuals within each team, the various maillots and the ever-changing technology behind the bikes. There are also huge individual personalities within cycling, both female and male. The 2021 version has seen some huge new personalities emerge and one all-time great cement his place in history.

But if there is only one thing about this sporting event that I love, it would have to be the suffering. Maybe that’s why I’m a fixed-income investor, and maybe that’s why I am once again reminding you that not all is rosy in the garden. Stocks are at all-time highs, credit spreads are near all-time lows, the supply of financing is plentiful, funding is cheap, and, at the time of writing, mergers and acquisitions (M&A) are exploding. But all is not good, I’m afraid. Interest rates are not at zero because things are great, quantitative easing does not continue apace because everything is good, the pandemic is not over and, I am sorry to say, growth is not uniformly strong.

To return to my cycling introduction, it feels like we are flying up the Col du Tourmalet at 25 kilometres an hour, with the wind in our hair, sun on our backs and unlimited strength in our legs. But look down! You’re riding an electric bike, and the assistance the motor is providing is the only thing preventing you rolling all the way back down the climb. Let’s hope our battery doesn’t run out anytime soon.

Issues in focus this quarter

In this issue of 360°, we also take a closer look at three areas:

  • Public credit: how did credit markets performed in the second quarter?
  • Leveraged loans: ahead of their pre-pandemic levels.
  • Real estate debt – climate-change impact: mitigating the climate impact of our built environment.

See below for a flavour of these sections or read the full report for a more comprehensive picture.

Credit performance was strong across the board over the second quarter. Global investment grade delivered 2.72% to recover some of its first-quarter losses while global high yield returned 2.56%. From a rating perspective, we continue to see the sweet spot for relative value in the BB part of the market in both the US and Europe as central-bank buying limits the attractiveness of BBBs and rates volatility has led to the outperformance of lower-quality credit. Regionally, we continue to prefer the European high-yield market over the US given a more attractive convexity profile. Meanwhile, EMs appear cheap compared with their DM counterparts.

The leveraged-loan market continued to be strong in the second quarter, with the S&P European Leveraged Loan Index (ELLI) returning 1.09%. June was the fifteenth consecutive month in which the S&P ELLI showed a positive return. Notably, the index returned 9.91% for the last 12 months, mainly driven by single-B (+8.98%) and triple-C (+24.28%) rather than double-B (+5.27%).

We have a responsibility to mitigate the climate impact of our built environment. Tenants, borrowers and lenders can work together to reduce the carbon emissions from real estate.

Fixed Income Quarterly Report

Q3 2021

Archive: previous editions of 360°

As fixed income markets have moved through the economic cycle, our thinking has also developed – take a look at some of our previous reports to see how the investment landscape has changed over the past year.

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