Most credit markets posted positive gains in the first quarter of this year, amid a backdrop of rising US Treasury yields, a stronger dollar and lower expectations of 2024 rate cuts.
Floating-rate products topped the performance table, with leveraged loans and structured credit faring particularly well, according to analysis from asset manager Ninety One.
These benefited from the rise in risk-free rates, especially in the US.
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US and European high-yield bonds also performed well, as credit spreads tightened to help offset the negative impact of rising interest rates.
“At the start of the year markets were pricing in around 150 basis points of cuts by the US Federal Reserve over the course of 2024, but higher-than-expected inflation and surprisingly strong jobs data prompted a revision of this, and US Treasury 10-year yields rose from 3.88 per cent to 4.2 per cent over the first quarter,” said Jeff Boswell, head of alternative credit at Ninety One.
“In Europe, 10-year yields also climbed across the continent, largely due to the currently high correlation between US and other bond markets.”
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However, Boswell added that credit spreads in traditional markets such as high-yield debt are nearing the tightest levels seen over previous cycles, offering “limited potential for further price appreciation”.
He said there are other areas for credit investors to explore in current market conditions, such as structured credit, loans and selective parts of the short-duration high-yield and bank capital market.
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“[These] offer an attractive income profile and favourable downside characteristics,” he said. “While less well-known, they are well worth considering at this point in the cycle.”
