Disappointing Credit Market Returns Add Fuel to Bearish Bets

Corporate credit has failed to live up to lofty expectations of double-digit returns so far this year, fueling a string of bearish bets into the second half of 2023.

Global corporate debt returns have advanced just 3% after aggressive interest-rate hikes from policymakers at the Federal Reserve and their peers around the world. That’s a heavy blow to money managers that were banking on gains of more than 10% for high-grade bonds in 2023, predicted by the likes of Bank of America Corp., which has since revised its year-end target down to about 8%.

As traders brace for more rate hikes from the Bank of England, European Central Bank, and the Fed, it seems unlikely that returns will stage a massive turnaround any time soon.

“Credit in general is going to underperform what most people expected,” said John Luke Tyner, a fixed-income portfolio manager at Aptus Capital Advisors. “It’s priced for absolute perfection and absolute disinflation which is not happening very quickly.”

This year might be tougher than the market thinks. Softening US consumer spending data indicates that a sharp economic slowdown is looming — which risk premiums may not be reflecting. Michael Contopoulos, director of fixed income at Richard Bernstein Advisors, doesn’t see spreads in either the US or Europe as compensating investors for recession risk.

“Some will say that the investment-grade market is a good place to be — I mean, that’s high quality, certainly — but we don’t think corporate credit is actually where you want to be positioned at the moment,” he said in a Bloomberg Television interview.