Search this website. You can use fund codes to locate specific funds

Weekly credit insight

Chart of the week: CCC-rated credits underperform in an environment of uncertainty

Global economic growth gained momentum in the last quarter of 2019, resulting in strong performance for lower-quality credit. This came after the CCC-rated segment of the high-yield market underperformed its expected beta in 2019. Deteriorating earnings growth combined with a pick-up in defaults led to a lack of investor appetite for credits that lack the levers to weather a potential storm.

The economic recovery continued into the first month of the new decade and on a total-return basis CCC-rated credits outperformed those rated BB and B during the first half of January. But with the likely impact of the coronavirus increasingly uncertain, declining oil prices and credit markets hit with record-high supply, investors have since refocused on the higher-quality part of the credit spectrum. This meant that CCC-rated credits significantly underperformed in the last week of January (see figure 1)

Figure 1. Changing fortunes: performance of CCC-rated credits declines

Source: Federated Hermes, ICE Bond Indices, as at January 2020.

Macroeconomic headwinds from China and the looming presidential election in the world’s largest economy should lead to a pickup in dispersion. This year will be one where credit skills matter, as demonstrated by the levels of stress seen in the market at the turn of the year.

A rise in volatility when a large share of the market is trading above call increases the risk of extension. In this rapidly changing environment, investors should stick to the liquid part of the market and take a top-down view of the entire credit spectrum in order to dynamically reallocate capital.

More Insights

No time like now: why investors are moving on ESG
We take a trip down memory lane and into the future with ESG...
Can palm oil ever be considered sustainable?
With monocropping one of the main causes of deforestation, palm oil production needs to change. Rather than staging a boycott, responsible investors should engage with companies across the supply chain to encourage the adoption of globally recognised certification standards
Leading the way in climate-related engagement: Federated Hermes achieves A+ score in InfluenceMap study
Federated Hermes ranks among the top five firms in a study focusing on the climate-related engagement efforts of the world’s 30 largest asset management groups.
Weekly Credit Insight
A Lift-off in rates focuses attention on security selection and an unconstrained approach
A changing climate in fixed income: 360°, Q1 2021
In a sustainability-focused edition of 360°, we explore how sustainable finance shifted from a niche corner of the market to a position of prominence.
Credit Pulse: market update - 12 February 2021
What are our views on fixed income markets for the next coming months? How does the team prepare for the different possible outcomes?