Last week we discussed how the distribution of returns on offer in the credit markets has changed over the past 12 months and the extreme levels of clustering around the current average.
This week we look at the dispersion in year-to-date returns across various parts of the global credit universe. The situation is very different at the top down level, where the dispersion of the returns year-to-date has been extremely high. With the best segment of the market (CCCs) delivering 4.7% in total return and a spread tightening of 117 basis points.
At the same time the worst segment of the market (EM Sovereign) has returned -4.1% and a spread widening of 4 basis points. This has been driven by the very important shift in the macroeconomic environment globally and more specifically the market expectations around inflation and the eventual tapering of the monetary policy stimulus that supported the markets over the past 12 months.
The better economic backdrop is supporting parts of the market that are more leveraged to the economic environment (e.g. CCCs). The higher rates environment is painful for the higher quality (and longer duration) parts of the market (e.g. Global EM sovereign with duration of above 8 years) and helping banks at the same time, which can be seen from the performance of the additional tier 1 market in the chart below. The last thing to note is that European High Yield is outperforming US High Yield on total return differential because of market expectations that the US is closer to tapering than the EU, leading to a bigger move on the government bonds side in the US.
Source: Federated Hermes, ICE Bond Indices. Past performance is not a guide to future performance.