The more things change, the more they stay the same.
This French proverb aptly describes credit markets and the performance they’ve witnessed to start 2023. That’s not to say markets overall have been driven by or performed the same as they did a year ago. However, macro sentiment around the path of interest rates, preference for risk-taking and the general economic outlook has had a remarkably similar impact on corporate credit as it did in the first half of 2022. In our view, the relatively stable underlying fundamentals in credit markets—which have continued through Q1 and are unlikely to change in Q2—are making them heavily dependent on factors originating outside of credit markets themselves.
Key takeaways
- 2022 was a challenging year for markets, as inflation, rising interest rates, a hawkish Fed, geopolitical tensions and recession fears weighed on many traditional asset classes. High yield bonds ended the year down -11.22% while loans, which were buoyed by their floating rate coupons, lost -0.60%.
- Despite these headline declines, a benign default environment and strong corporate fundamentals kept spreads relatively maintained. Yields in each market have, however, risen substantially, with high yield bonds and loans each offering loans in excess of 9%. Historically, forward returns from similar starting yield levels have been attractive.
- Many of last year’s uncertainties remain, which we believe may continue to stoke volatility. Plus, the probability of a recession at some point in 2023 has risen substantially. Still, we believe the strong fundamentals that currently support credit markets make them relatively well-positioned to navigate this environment. We stress a need to remain active and prefer an up-in-quality approach to credit, which includes a preference for bonds over loans and higher-rated assets within each market.
