Alternative Credit Letter

Since the start of the year, credit spreads of European loans have increased from around 400 bps to above 700 bps. At the same time, short-term interest rates have just been lifted to around 2% by the ECB on October 27th. As a consequence, European loans earn now on average an attractive yield of 9% […]

The Fed’s rate hike path in 2022 is driving up bond yields in all markets. For example, the yields of the short-term high yield and investment grade bond indices bottomed out in 2021 and climbed to a high of 10.2% and 5.3%, respectively, by the end of September 2022. The latter is a remarkable rise

In March 2022, the USD swap curve became inverted and by the end of August the difference between the 2-year vs 10-year tenors fell to -0.6% (see also Alternative Credit Letter in April), a signal of economic weakness ahead. In June this year, the Fed funds futures curve also inverted, pointing to a more dovish

The peak Fed funds rate is currently priced in at a level of 3.4% (down from >4% in mid-June) for February 2023. However, the shape of the curve is of even greater importance. The inverse shape of the current Fed futures curve indicates that the market expects the Fed to succeed with its measures to

Fixed income markets suffered in June another painful month. For example, high yield bonds are down -7.3% and -16.7% YTD, the worst half-year performance since the global financial crisis in 2008. The sell-off this year has been deep, but the pattern has not matched that of previous ones as it was primarily driven by higher

The Bloomberg Global Agg. Bond index, which is composed of corporate and government bonds, experienced with a decline of -11.6% year-to-date by far the worst performance on record! The losing run came only to a halt in mid-May with a loss of -12.4% and recovered only slightly since then. The chart in the monthly spotlight

Yields of US short term low grade bonds broke through the 10-years average of 5.7% and reached a level of 6.9%. Since the Fed signalled a faster pace of interest rate increases in the coming months, investors divested longer term bonds in favour of their shorter term counterparts. The yield curve steepening by more than

In macro-finance, it is well known that an inverted yield curve is signaling a recession or at the very minimum, it is indicating that the economy is operating in a late cycle. For example, the 2-year/10-year Treasury slope has inverted in advance of 7 of the past 8 recession periods. However, it is a less

Within a matter of only two weeks, European High Yield spreads have jumped to a spread level of 480 bps, well above the last 5 years average of 366 bps and back at August 2020 levels. As chart 8 on page 2 demonstrates, sectors such as “food & beverages” or “chemicals” performed the worst given

Looking back at the last rate hike cycle (2015-2018), credit spreads for both high yield and investment grade bonds were not immediately negatively affected when the Fed rates started to take off. However, the more mature the economic cycle became, the stronger the negative effect was, as reflected in the widening of spreads in 2018