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Fixed Income
Focus on finding idiosyncratic company and sector opportunities

Global corporate bond spread movements were muted over the quarter. Broader risk sentiment was negatively affected by slower-than-expected growth, doubts about China’s recovery and central banks’ monetary policy. However, this was countered by relatively sound corporate fundamentals and demand for the asset class. The credit spread on the Bloomberg Global Aggregate Corporate Index narrowed to 127 basis points (bps) before widening in the second half of the quarter, ending the quarter at around 135 bps, around five bps tighter than end of June levels. European credit spreads tightened overall during the quarter, whereas US credit spreads widened marginally.

Global, US and European corporate bond spreads have widened from the 2021 lows

Data as at 29 September 2023. Percentiles from August 2000 for US/Europe and August 2001 for Global. IG: investment grade. Indices: Bloomberg Euro Aggregate Corporate Index, Bloomberg US Corporate Investment Grade Index, Bloomberg Global Aggregate Corporate Index. Source: Bloomberg

Market participants started to realise that interest rates are likely to stay higher for longer, causing financial conditions to tighten with the US yield curve steepening as yield rose. In this environment, total returns were negative, with the Bloomberg Global Aggregate Corporate Index returning -2.73% in US dollar terms on an unhedged basis, although both US and European corporate bonds generated marginally positive excess returns. Financials bonds outpaced bonds issued by industrials and utilities companies, with banks expected to benefit from a longer-than-expected high interest-rate environment.

Looking ahead, the environment and outlook for corporate credit spreads is mixed with central bank tightening, the ongoing uncertainty around growth and recession and expected softer corporate fundamentals weighing on the market. Valuations are not compelling looking at index spread levels, but there are pockets of opportunities: spreads on European corporate bonds are wider than US corporate bonds and valuations for financials bonds are more attractive than industrials.

The “all-in” yield on global corporate bonds also looks attractive after the recent sell-off in government bond markets and the steepening in yield curves. The demand for the sector, which has kept spreads relatively compressed since the wides earlier in the year, should also continue to be supportive going forward. Given the uncertainties, our focus is on finding idiosyncratic opportunities at the company and sector level, in areas such as in banking, utilities and chemicals.


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