Credit spreads test post-financial crisis lows
Solid economic and fundamental backdrops, the likelihood of widespread vaccine distribution, and implicit Fed support should maintain the bullish sentiment.
Senior secured loan and high yield bond spreads (bps)
Source: ICE BofAML U.S. High Yield Index, S&P/LSTA Leveraged Loan Index.
Following a banner year in 2019, both high yield bond and senior secured loan markets entered 2020 with spreads nearing the lows seen after the Global Financial Crisis (GFC). Even after the rout in March, the remarkable market recovery has left spreads looking relatively tight once again. This begs the question: How much more room does credit have to run? We think spreads will continue to compress during 2021 and are likely to test or surpass the post-crisis lows last seen in 2018.
A solid economic backdrop, the likelihood of widespread vaccine distribution, and implicit Federal Reserve support should serve to maintain the current bullish sentiment. Technical conditions should remain supportive as we believe issuance will remain steady and high yield inflows will continue. We expect the CLO market to continue to thaw, and the possibility of moderately higher interest rates could reignite demand for floating rate assets, providing key support for loans. Lastly, the relatively low level of global interest rates, even with a moderate increase in the U.S., will likely continue to create demand for fixed income asset classes that provide the highest absolute yields, like high yield bonds and loans.