Credit benefits from its senior position within the capital structure of companies, the must-pay nature of its coupons and its ability to capture the upside during periods of market recovery. All this means that the asset class has received increased attention from asset allocators this year, resulting in positive inflows since the start of January.
However, the healing process taking place in the high-yield credit market is progressing at different speeds on either side of the Atlantic (see figure 1). In the US, credit-market flows are positive, and the primary market is open even for credits that face the most challenges (albeit only at the secured level for those in the most precarious situations).
Figure 1. US credit flows charge ahead
Source: Federated Hermes, Bloomberg, as at June 2020.
By contrast, European credits have not recovered to the same extent. The primary market is only normalising slowly and has seen limited issuance – largely by the strongest firms in sectors less affected by the pandemic – since February.
This gap can be explained in part by the relative attractiveness of US credit: hedging costs have fallen, while the Federal Reserve has announced a programme to support the front end of the rapidly expanding fallen-angel market, which has helped alleviate the risk of indigestion. This has supported primary markets and has allowed investment-grade curves to normalise.
The situation in Europe is different, as the European Central Bank has so far not provided a similar level of support. Moreover, as the hedging costs have come down with USD LIBOR for foreign buyers of US-dollar debt, US credit has become increasingly attractive for investors outside of America.
Common on both sides of the pond is the fact that higher-quality credit is leading the recovery. In an environment of heightened dispersion, a flexible, global approach to the fixed-income universe is more important than ever – something we discuss in our piece on all-weather credit allocation.