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June 2020 | GSAM Connect

Looking Back to Move Forward

As we approach the halfway mark of 2020 we take stock of corporate credit developments year-to-date (YTD) and outline thoughts for the remainder of the year.

  1. A V-shaped drawdown. Corporate credit weakened abruptly in March amid an unpreceded economic contraction induced by COVID-driven lockdown measures.However, the rebound has been equally rapid, with market responding to unprecedented policy stimulus. For example, US investment grade credit experienced a - 15% loss between March 6 and March 20 but has since rebounded 17% to deliver a total return of 5% YTD1. That said, credit spreads remain above their 2020 lows and we see room for further spread tightening ahead.
  2. Upgrading our downgrade forecast3. For 2020 as a whole, we think around $308bn of bonds (par value) will depart investment grade and enter high yield; $145bn of these fallen angels have already migrated. This is lower than our earlier estimate for $345bn of fallen angels this year. The ‘upgrade to our downgrade’ forecast reflects more benign outcomes expected for some companies that have taken necessary steps to preserve credit ratings. This includes shoring up liquidity; gross new issuance is in excess of $1.1tn YTD, representing more than a 99% increase relative to a year earlier. Looking ahead, we expect a more muted new supply calendar. We also estimate that 5.8% of US investment grade index constituents have a more than 30% likelihood of being downgraded to high yield over the next twelve months, and we are mindful of a deterioration in credit metrics due to debt issuance.
  3. Moving forward with diversification and selection2. Notwithstanding the supportive policy backdrop, elevated uncertainty alongside potential for downgrades and defaults requires astute security selection. Moreover, we believe diversification across sectors and issuers has the potential to reduce risk and protect performance. Broadly speaking, we remain cautious on sectors that face both cyclical and secular challenges, while we seek to purchase corporate bonds that provide potential for attractive carry and roll down.
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