Credit market valuations imply improved fundamentals in 2021

The current valuations across credit markets not only imply an improved fundamental situation, but they also point to the potential for higher prices ahead, according to Eaton Vance.

Stephen Concannon, co-director of high yield bonds and Andrew Sveen, co-director of floating-rate Loans at Eaton Vance Management said that credit markets might feel like they were starting 2021 in something of a tug-of-war between two competing force as developed markets were in the midst of a significant additional wave of COVID-19 while the rock-bottom interest rates, combined with additional fiscal stimulus and the start of vaccination programs around the world gave financial markets much to be optimistic about.

“With the loan market coming into 2021 at an average price just over US$96 ($126), we think there is some capital appreciation to supplement the coupon income available in this market. In high-yield corporate bonds, we believe the rebound in economic activity has the potential to drive spreads a little bit tighter. However, both markets are susceptible to volatility as the pandemic continues,” Concannon and Sveen noted.

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Also, net inflows returned to the loan market in December after a year mostly dominated by outflows and the results of the Georgia Senate run-off brought the theme of reflation back into focus, which may provide a technical tailwind for the floating-rate loan markets.

“With increased demand for the asset class, we expect a busier year for supply,” they continued.

“Whatever appreciation potential exists is probably modest. Yet that's not likely to diminish the attractiveness of credits, as yields and spreads outshine much of what's on offer in today's yield-starved fixed income environment.

“In particular, we still see opportunities to lend to companies in some more challenged sectors such as leisure and gaming, focusing on those with both sufficient liquidity to weather the current economic disruption and a clear reason to exist in a post-pandemic world.

“Looking across both markets, we think relative value is more finely balanced at the start of 2021, with opportunities for positive total returns. Though current valuations across credit markets imply an improved fundamental situation, they also point to the potential for higher prices ahead.”

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