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.
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.”
Recommended for you
Equity Trustees has paid three infringement notices issued by ASIC in which the corporate regulator alleged it made misleading statement about investments in a sustainable bond fund.
Only three active asset managers are forecast to see positive flows through to FY29, according to Morningstar, with those focused on specialist fixed income in the best position as investors move to defensive asset allocations.
Platinum Asset Management has provided an update on the possibility of a merger with asset manager L1 Capital following a period of due diligence.
Fund manager Pacific Current has appointed a former superannuation chief executive as its newest chair, succeeding Tony Robinson who departs after almost a decade to focus on his role at COG Financial.