A Global Credit Tour

Thoughts on the Market vor 1 Jahr

0:00

4:45

With the US election as a backdrop, our Head of Corporate Credit
Research Andrew Sheets tells three stories that help encapsulate
the state of global credit markets.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Andrew Sheets, head of
Corporate Credit Research at Morgan Stanley. Along with my
colleagues bringing you a variety of perspectives, today I'll go
around the credit world in three short stories.

It's Thursday, October 31st at 2pm in London.

The US election next Tuesday continues to be a top issue on
investor minds, and indeed is a top issue for us here at Thoughts
on the Market, where it’s dominating your feed over this
week.

For credit, our positive view this year has been closely tied to
the idea that the asset class likes moderation. For example, in
data released yesterday the US economy grew a solid 2.8 per cent
in the third quarter, while core inflation moderated to just 2.2
per cent, close to the Fed’s target. And Morgan Stanley’s
forecasts for the rest of this year and next see that pattern
continuing: Solid US Growth, falling inflation, driving steady
further rate cuts from the Federal Reserve and all creating a
better-than-expected backdrop for credit that should support
tighter than average spreads.

That idea that credit likes moderation is core to how we view the
election. Outcomes that could drive larger changes in economic
policy, domestic policy or foreign policy, are all larger risks.
And outcomes that could drive more moderate outcomes across all
of these factors are likely going to be better for credit, in our
view.

But you may also be tired of hearing about the election. And so
for you, here is a quick tour of the credit world in three
non-election stories.

In Asia, Korea will be added to the FTSE World Government Bond
Index, an important benchmark for global bond investors. This has
significant implications across Korean assets, but for Credit, it
may be most important for sparking more interest in Corporate
Bonds denominated in local Korean Won.

This is a larger market than investors may initially realize,
totaling roughly $1 trillion US equivalent in size. And
meanwhile, the exposure of foreign investors to this market is
historically low. A large market with little global exposure is a
potential opportunity.

Moving to Europe, you could be forgiven for thinking the mood is
pretty dour. Growth has been weaker than in the United States,
while the US Election is raising questions around everything from
disruptions to trans-Atlantic trade, to the future of NATO, to
the war in Ukraine.

But over the last month, flows into European credit have been
extremely good. Per work by my colleagues, inflows into European
credit have reached record levels over the last several months.
The start of rate cuts leading investors to lock in
still-attractive all-in yields in Europe is a big part of this
story.

Finally, in the US, we continue to see remarkable shifts in the
ease with which investors can trade large volumes of corporate
bonds. So-called portfolio trading, where investors buy or sell
bonds as a group, continues to grow, with September seeing a new
all-time high in activity. Year-to-date, through September, we
estimate that roughly $760 billion – with a ‘b’ – has been traded
this way. It’s never been easier to trade very large volumes of
corporate bonds.

The US election on November 5th will continue to dominate
investor focus over the coming days. As it should. Credit has
been an enormous beneficiary of the recent backdrop that’s seen
solid growth, moderating inflation, and moderating policy rates.
The vote will have an important bearing on whether that
moderation continues, or if something new takes its place.

But away from the election there are other important things
happening. Korea’s Local Currency Corporate bond market is a
large, underinvested market that may get more attention after
index inclusion. European Credit is seeing record flows despite
its macro uncertainties, an indicator of underlying investor
demand. And in the US, the continued rise of portfolio trading is
re-shaping market structure and improving the ability to trade
ever larger volumes of corporate bonds.

Thanks for listening. If you enjoy the show, leave us a review
wherever you listen and share Thoughts on the Market with a
friend or colleague today.

Oh, and Happy Halloween.