Darpan Harar, Multi Asset Credit Portfolio Manager at Ninety One
Against the backdrop of rising sovereign bond yields, the fourth quarter was a mixed period for global credit markets. Floating-rate assets, including collateralised loan obligations (CLOs) and leveraged loans, outperformed – both in Q4 and the year as a whole. The sharp rise in US Treasury yields weighed on investment-grade assets, with the US market underperforming.
Darpan Harar, Multi Asset Credit Portfolio Manager, Ninety One: “Investment-grade (IG) markets had a volatile quarter. This was especially stark in the US, where the 10-year Treasury yield rose by a significant 80bps, driving a total return for US IG of -2.8% for the quarter. The fact that market return was negative despite credit spreads continuing to grind tighter underscores the magnitude of the risk-free-rate moves (and therefore bond yields) over the quarter.
These divergent dynamics seen throughout 2024 meant that for the year as a whole, the US investment-grade market returned an uninspiring 2.8%, despite credit spreads tightening by an impressive 22bps.
Figure 1. US investment-grade spread and yield divergence
Source: BofA. 31 December 2024. BofA US Investment Grade. Spreads are option adjusted spreads (OAS)
Unsurprisingly, credit spreads in most sectors within the US investment-grade market are now near or at historically tight levels (i.e., valuations are historically expensive, and investors are receiving limited compensation for credit risk). However, the fact that US investment-grade all-in yields are again comfortably above 5% is likely to lure buyers back into the asset class in 2025 – in much of 2024, investors proved very willing to overlook expensive valuations and instead focussed on attractive yields. But Harar sees better opportunities across the wider specialist credit market.
Harar explains: “While credit spreads in traditional markets, such as US high yield and investment-grade, remain near the tightest levels seen over previous cycles, we see good value in more specialist areas of the market and more defensive sectors.”
Looking to other areas of the market, corporate hybrids finished 2024 on a strong note, posting a return on 1.7% in Q4 to end the year up 9.3%. And despite a more muted fourth quarter, it was the strongest year in a decade for the bank capital market (AT1s), which generated a US dollar-hedged return of 12.8% in 2024. The US collateralised loan obligation (CLO) market also performed well.
“A stronger spread rally across US CLOs helped all rating categories outperform their European peers in the fourth quarter. Growing demand across a range of investor categories and the expansion of the middle-market CLO segment in the US has contributed to the growth of the CLO market, with volumes surpassing previous records set in 2021.” Harar said.
ENDS
