The easing policies from the monetary tightening implemented by the main ones Central Bankscombined with solid economic growth and moderating inflation, should be a tailwind for corporate bonds investment grade. This is what he underlines Tim Crawmer, Global Credit Strategist by Payden & Rygel.
Investment grade issuers in excellent health
We believe that a “soft landing” remains the most likely scenario on a one-year horizon and, for the remainder of 2024, we continue to expect sustained growth in GDP US, with an unemployment rate slightly higher than 4% and moderate inflation. Looking ahead, “we see GDP growth in line with the trend (~2%), with core inflation declining at a faster rate towards 2% target set by the Fed. The labor market, after a probable further weakening, is expected to stabilize during 2025, as the low number of layoffs should help contain the unemployment rate. In line with a soft landing scenario, markets are now pricing in 200 basis points of rate cuts between now and early 2026, until reaching neutrality, in the 3-3.5% range on Fed Funds. Even outside the United States, almost everywhere rates have already reached their peak or central banks have already started cutting.”
Despite the tightening of spreads, all-in returns “remain historically high, with theyield-to-worst” equal to 4.55%, inside the 69° percentile, meaning that more than two-thirds of monthly return observations since 2001 have been lower at the current level. Although corporate credit spreads are currently tighter than the long-term average, this is a frequent phenomenon in similar contexts, already seen between 2004 and mid-2007. Assuming the Central Banks manage to orchestrate a landing soft, we believe spreads may remain tight for an extended period of time.”
Payden & Rygel’s analysis
From the point of view of corporate fundamentalsalthough a weakening is underway,”we expect issuers companies remain substantially in excellent health. In fact, these are issuers who paid off their debt when interest rates were at their lowest, thus reducing their sensitivity to the economic cycle and rates. If our base case proves correct, we expect corporates to also benefit from the robust economy and supply and demand dynamics should support the asset class going forward.” January and February they saw “a surge in new issues, as issuers turned to the market primarily to refinance debt already contracted, rather than to increase the share of new debt, and net supply subsequently remained limited. In our view, this is a symptom of companies keen to keep leverage within manageable levels and capable of absorbing morefinancing costs. We believe that net supply will stabilize further in the future.”
The scenarios
For how long a recession is not our basic hypothesis, “the risks of an economic collapse have increased, a collapse that would induce the Central Banks to cut ratesi more aggressively than current market expectations. In such a context, we would expect a decline in global government bond yields along the entire curve, as well as a widening of the credit spreads”.
However, “it wouldn’t necessarily be a scenario negative for investment grade credit: the decline in government bond yields could attenuate or offset the losses resulting from widening spreads, as the duration incorporated into global corporate credit should represent a sort of “safety net”. Furthermore, a starting yield of around 4.6% should provide a cushion against capital losses: all-in corporate bond yields should rise by 3/4% to compensate for the initial advantage dyields (based on the current duration of ~6 years for the Bloomberg Global Aggregate Corporate index)”.
