Spikes in credit-market volatility, ultra-low interest-rate volatility and rising positive cross-asset correlations are all realities that investors have had to contend with recently. As we enter the final quarter of the year, it seems a good point to take stock of the journey that started in February with credit spreads at record tights and resulted in the most challenging first six months of the year on record for credit markets (see figure 1).
Figure 1. Credit spreads: a turbulent year
Source: ICE Bond Indices, as at October 2020.
After growth expectations declined in March, stimulus from central banks kickstarted the healing process and supported the first leg of the recovery. It took a few months before improving coronavirus case numbers translated into better economic data in May, which supported a further tightening of spreads. By the middle of the summer, it became harder to satisfy market expectations for central-bank support and improving economic data – resulting in more stable market performance.
With a pickup in volatility and a final quarter of the year that includes the US presidential election and the UK’s exit from the European Union, what should we expect going forward? The initial recovery phase is likely to be followed by a longer period of rehabilitation, where companies – and their credit profiles – adjust to the new coronavirus normal. To hear our thoughts on the past six months and the road ahead, listen to our recent two-part Delta podcast.