A world of opportunity: 2020 credit market outlook

Timely insights from portfolio managers and industry experts on key financial, economic and political issues.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.

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      By Jeffrey D. MuellerCo-Director of High Yield Bonds, Portfolio Manager, Eaton Vance Advisers International Ltd. and Justin H. Bourgette, CFAPortfolio Manager, Global Income Team

      London - Global credit markets comprise a broad and diverse opportunity set. That much is known, but what we are more often asked is where the most attractive relative value opportunities in credit can be found. With the start of a new year, the Eaton Vance Multi Asset Credit team answers that question below.

      Bank loans and high yield. Last year, bank loans and global high-yield bonds enjoyed strong performances, posting returns of 8.64% and 13.64%, respectively.1 While we considered both asset classes attractive, for much of last year we favoured high yield. However, we now hold a more balanced view on opportunities between these two key credit markets, given our view that bank loans' recent underperformance has opened up better value opportunities in the space.

      Non-USD high yield. The large interest-rate differential between the US and Eurozone and the inherent regional differences in constituents of the two markets can complicate efforts at assessing relative value. For instance, European and Japanese investors often judge the cost of hedging USD securities to be too high, while US investors say that yields on EUR and GBP securities are too low. In taking a global view, we can conduct in-depth research across these market areas and make apples-for-apples comparisons. In doing so, we continue to find attractive opportunities in non-USD denominated corporate bonds (on a currency-hedged basis), particularly when issued by US companies that are not well known to European investors.

      B-rated corporate credit. BB-rated credit led the charge during the rally in 2019, outperforming lower-rated equivalents. As a result, credit spreads are now trading inside their tightest quartile across BB-rated US and European high-yield corporate bonds and bank loans. While the BB segment offered better value historically, we think the forward-looking expectations for returns are more limited from this higher quality part of the leveraged credit universe. As a result, we favour B over BB-rated investments across bonds and loans.

      Collateralised loan obligations (CLOs). We believe that structured credit continues to offer many opportunities for attractive total and risk-adjusted returns. Currently, CLOs rated BBB and BB yield around 5.44% and 9.07%, offering credit spreads of 367 bps and 722 bps.2 The yield pickup available in CLOs reflects the complexity of analysis required for these assets and the fact that CLOs are typically less liquid than either bonds or loans. Notably, default rates in this part of the market are low and the structural protections on offer for CLO investors may help to reduce further the likelihood of default and loss. Within this market, we favour BB and BBB-rated CLOs over similarly rated bonds and loans.

      Emerging-markets debt (EMD). Frequent headline grabbers like Argentina and Turkey have caused some volatility in the EMD world over the past 12-18 months, but that increased volatility at the asset-class level can create attractive entry points at the individual company and economy level where issuers show strong and improving fundamentals in their own right. Within EMD, we favour sovereign credits that are more likely to benefit from a price realignment that reflects their stronger fundamentals.

      Bottom line: Following a positive year for credit markets in 2019, we continue to see many attractive investment areas. We believe, however, that in-depth research and a highly selective approach that looks across the full breadth of opportunities in global credit markets will be best suited for investment success in 2020.