Credit market monthly review: May 2017
Credit remains strong and stable through the political noise
- We remain constructive on credit amid improving macro fundamentals, with a preference for high yield (HY) over investment grade (IG), albeit with the caveat that spreads do feel unnervingly tight in both HY and IG.
- Assuming ‘yield only’ returns into year-end, Anglo-Saxon HY should return c.8% in 2017, Anglo-Saxon IG and euro HY from 5% to 6% and euro IG a modest 1.5-2%.
- The reflation trade (HY outperformance over IG) paused in May and is in need of a fresh boost; if not from policies by the US administration then perhaps from a strong second quarter earnings season.
- IG credit valuations remain stretched but they improve markedly if we consider ‘cost’ rather than ‘stock’ of debt within our model inputs.
- We don’t see Corporate Sector Purchase Programme (CSPP) as a key spread driver near term and neither do we expect contagion in EUR credit in case of a market unfriendly UK election result.