In the final Weekly Credit Insight post of 2020, we take stock of the performance of different parts of the credit market throughout the year.
In this unprecedented year, credit markets delivered respectable returns as carry – the accumulation of coupon payments over time – provided much-needed cushion amid volatility in spreads. Central banks worldwide lowered benchmark interest rates, helping to ensure cheaper funding for investment-grade issuers and therefore supporting returns for higher quality credit.
Companies descending to high-yield status, the so-called fallen angels, proved commentators right and outperformed the global high-yield market from the lows of late March onwards. Meanwhile, the rise in defaults caused by the pandemic has diminished returns from instruments rated B and CCC.
Emerging-market issuers performed well, helped by their higher average credit quality and a better ability to cope with volatility when cash flows weakened.
With the value of negative-yielding debt having reached an all-time high of $18tn and with the year almost at a close, the market will focus on the risks for 2021, namely the taper tantrum, shifts in corporate behaviour and the withering cushion provided by the carry in this (new) new normal.
Figure 1. Returns across market sectors in 2020
Source: Federated Hermes, ICE Bond Indices as of 15 December 2020.