Corporate credit outlook

Q3 2020: Mixed signals

Despite multiple “worst-ever” indicators, U.S. equity and corporate credit markets rallied back to near pre-pandemic levels in Q2. With markets trending one way and economic data another, we’re left with mixed signals.

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June 30, 2020 | 23 minute read

Executive summary

As we wrote our Q2 outlook around the time markets bottomed near the end of March, we noted that in periods of great uncertainty companies often withdraw their forward guidance for earnings. It seemed appropriate to do the same regarding our outlook for credit markets at that time as record declines across asset classes signaled pervasive pessimism. How could we possibly forecast how markets would handle what was anticipated to be the worst quarter for GDP growth since WWII, if not ever?

Key takeaways:

  • The bounce back in credit has been almost as swift as the decline, with strong returns from all major asset classes quarter to date.
  • A “don’t fight the Fed” mentality surfaced as sentiment for risk assets has broadly improved.
  • Decomposing returns by rating shows that the recovery has been orderly, with higher-quality credits performing well. Dispersion in return by rating could present opportunities for active managers.
  • Revenue and EBITDA growth took a huge hit in Q1, and we expect statistics to show further deterioration when Q2 data is released.
  • We’re continuing to watch supply/demand dynamics as credit markets face excess supply even as investors have piled back into high yield bonds and the CLO market has thawed, increasing demand for loans.

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Robert Hoffman, CFA

Managing Director, Credit Wealth Solutions

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