CREDIT
RISK MONITOR
Dispersion is the name of the game
Spreads tightened and strong investor appetite supported credit issuance as investors focused more on the benign implications for credit (e.g, contained default rates, firmer cash flows) of upside surprises to macro data than to diminished expectations of interest rate cuts. We foresee the possibility of further spread tightening but accompanied by rates volatility if strong (US) growth causes supply-led disinflation to evolve into demand-led inflation. At this point in the cycle, we expect greater return dispersion within sectors. Issuer selection will be even more critical at this juncture.
Jim Cielinski, CFA
Global Head of Fixed Income
Key Takeaways
- Upside surprises to macro data are positive for earnings and credit quality, all-in yields remain attractive and the appetite of capital markets for new issuance has eased concerns about debt refinancing. We continue to see attractive opportunities in credit and the potential for further spread tightening.
- Some bumpiness in the cycle may materialise, however, as rate volatility has picked up. While the gradual downtrend in inflation may persist on a global basis, there exists the risk that strong growth in the US could see supply-led disinflation evolve into demand-led inflation, potentially delaying monetary policy loosening.
- The dispersion in central bank policy globally, evident again in the first quarter, will likely continue. We also expect return dispersion to become more notable within sectors and industries, with higher quality companies outperforming certain weaker counterparts, especially if rates stay higher-for-longer. Security selection has considerable scope to add value at this juncture.
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