‘Carry on’ to year-end despite reflation trade fade

Paris, 11/09/2017



Greg Venizelos, 

Senior Strategist (Credit, IG, HY and SSA)

Credit market monthly review


Key points

  • Credit spreads widened in August while credit yields declined as government bond rates fell back, underpinning total returns as a result. USD High Yield (HY) looks set to reach 8% total return for 2017, USD Investment Grade (IG) 7%, European HY 6% plus and European IG 2% plus.
  • August endured negative excess returns across most credit markets for the first time since June 2016, when the UK voted in favour of Brexit. Historic norms imply negative excess returns 12 months forward, consistent with our view for mild spread widening and HY/IG spread decompression.
  • The reflation trade of HY outperformance over IG looks set to come under pressure for the remainder of the year unless we see a meaningful back-up in government bond rates. That said, the default outlook remains benign and stable, thus bolstering the health of HY returns.