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

Weekly Credit Insight

Chart of the week: yield-curve control will support market normalisation

Market normalisation is underway, supported by the rising probability that the Federal Reserve will carry out yield-curve control and a better-than-expected recovery in Purchasing Managers Index readings. Earlier this year, the dual shock of the oil-price crash and coronavirus crisis encouraged institutions to hoard cash and resulted in the greatest liquidity squeeze in a decade.

Markets responded in typical fashion to the decline in liquidity condition: credit curves inverted and both bonds and higher-quality credit underperformed (the latter on a beta-adjusted basis).

Since then, the primary market has reopened and even businesses exposed to the pandemic shock have been able to access funding, causing credit curves to steepen again (see figure 1). Earnings season gave investors an insight into the impact of the crisis on cash-flow generation, as well as what tools firms have to navigate the uncertainty, meaning that high-quality credit started to lead the market recovery.

Figure 1. Curves start to steepen

Source: Federated Hermes, Bloomberg, as at June 2020.

The relationship between the synthetic and cash markets has also largely normalised. Primary issuance has increased as companies hurried to take advantage of the positive climate and improve their liquidity position. This has resulted in strong flows into global credit markets as investors start to see the benefits that the asset class has to offer in the current environment.  

More Insights

SDG Engagement Equity commentary: a global leader in the boating industry
We demonstrate how we are engaging with a global leader in the boating industry to create positive impacts on society.
Credit investing in the coronavirus era: 360°, Q3 2020
What is our current view of fixed-income markets? And where do we see the best relative value?
Weekly Credit Insight
The pandemic has prompted an unprecedented reaction from central banks across the globe
Credit: Industry Insights
Filippo Alloatti, Senior Credit Analyst, shares his views on financials.
Your Questions Answered by Unconstrained Credit
A quarterly series featuring the top 10 questions that clients and prospective clients ask our investment teams.
Sharpe Thinking
Markets are weighing up the future in order to make sense of the new normal.