Given the headwinds of Brexit and a slowing UK economy, there is concern that sterling credit valuations look extended – with the average investment credit grade spread narrowing from 1.5% to 1.25% in six months. Conversely, the compensation needed for default risk is significantly below current spreads.
So where will sterling investment grade credit spreads go to? At RLAM, we don’t think that sterling investment grade spreads will dip below 1%, as the headwinds remain in place. However, given current monetary policy, the dovish tone of central banks and the ongoing search for yield, it’s possible that investors will push spreads lower. This week’s new deals from Marks & Spencer and Prudential illustrate how much money is available for bonds offering a material yield premium over government bonds.
With the current level of government bonds and the prospect of more global quantitative easing, there is definitely a risk of a squeeze in credit markets, taking spreads below the lows seen in recent years.
Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice. Portfolio holdings are subject to change, for information only and are not investment recommendations.