Focus on corporate bonds – A good month for corporate credit, says Muzinich & Co

Corporate credit has benefitted from supportive policy and macro economic developments in the last month, according to fixed income manager Muzinch & Co.

A strategy note said risk had outperformed up to mid September, supported by a strong technical environment. Investors welcomed a series of positive Central Bank announcements as well as favourable news out of Germany related to the Euro crisis.

The ECB sent markets a strong signal that “the Euro is irreversible” by offering to purchase in unlimited amounts Eurozone countries’ short‐term bonds in the secondary market. The following week, the German constitutional court approved the Eurozone’s new bailout fund and budget pact.

European equities and high yield debt asset classes outperformed, followed by US high yield, but high quality governments and US investment grade corporates declined.

Muzinich, with offices in New York, London, Paris and Cologne, noted that inflows have continued unabated for over three months and new issuance is particularly strong in the US and Europe. While the quality of new issuance was generally still solid, some leveraged buy outs have come to market and there has been limited covenant erosion. Other new issues that were supposedly significantly oversubscribed upsized their deals.

The US Federal Reserve announced QE3 by agreeing to inject an extra $40bn into the economy each month through purchases of agency mortgage‐backed securities. Unlike previous rounds of QE, this did not have a defined time limit.

The firm said it is watching developments in Europe, China and the Middle East. “We believe the uncertainty ahead of the US election and the much talked about ‘fiscal cliff’ will dampen somewhat the outlook for corporate spending. On the corporate front, we expect new issuance will remain robust given low interest rates and investor demand.”

“We anticipate some new issuance will come with weaker covenants (and) shall remain highly selective in our purchases. Next month will mark the start of third quarter earnings reports which are generally expected to show some softening given economic uncertainties. Fundamentals will matter again.”

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