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

Weekly Credit Insight

Chart of the week: when reality meets expectations

Credit-market volatility has fallen in recent months, particularly in the investment-grade universe. Yet as the US election, a potential hard Brexit and a resurgence in coronavirus cases loom on the horizon, this recovery could come to a halt as the market catches up with forward-looking, options-market-implied volatility.

Expectations about the pace of the economic recovery and the likelihood of central-bank support have risen in recent months. This was evidenced by the muted reaction to news that the Federal Reserve would move to an average-inflation target, communications that interest rates would stay lower for longer and an upgrade in the fundamental outlook. Economic-surprise indices have declined, reflecting how expectations have swung from extremely negative to very positive.

It takes incrementally more good news for markets to move higher, meaning that it has become harder for data to beat expectations. Looking back at the 19 days when the iTraxx Crossover1 moved more than 20bps wider in a day over the past year, two of these days took place in the last week (see figure 1).

Figure 1. Volatility is on the rise

Source: Bloomberg, as at September 2020.

It seems certain there will be a pick-up in volatility over the rest of the year. Nonetheless, central banks still have some tools at their disposal and will likely react to a period of heightened volatility with outright yield targeting or by modifying the corporate-bond-buying programme.

  1. 1The European credit-default swap market index

More Insights

SDG Engagement Equity commentary: Glanbia
We are engaging with current holding Glanbia to create positive impacts on society.
Credit Pulse: market update - 15 January 2021
How does the fixed-income team at the international business of Federated Hermes see this year shaping up?
Weekly Credit Insight
Chart of the week: fallen angels fly high
Found in space: how markets could make contact with reality in 2021
This month, Fiorino looks to the stars for an alien-eye view of Earthly financial conditions...
Global Emerging Markets: country allocation review 2021
We consider our 2021 country allocations for global emerging markets.
Global Equities case study: Vonovia
We examine the favourable ESG attributes of current holding Vonovia