'Carry is king' in credit market trapped in summer stalemate

New York

GLOBAL credit markets have gotten so subdued that investors are focusing on a more humdrum source of profits: coupons.

JPMorgan Chase & Co and BNP Paribas SA have described it in the same way, with analysts at both banks adopting the refrain: "Carry is king," a reference to the return from simply holding a bond.

That's because it's getting harder to make any money from trading when volatility has all but vanished with policy makers still committed to rock-bottom interest rates and massive asset purchases.

As a result, risk premiums have been locked in a holding pattern since late March with investors wary both of buying at expensive valuations and selling aggressively with stimulus programmes still in place.

"It's a carry game at the moment and it looks better as volatility is near zero," said Greg Venizelos, a senior credit strategist at Axa Investment Managers, which oversees 869 billion euros (S$1.39 trillion). "We are calling for rock-bottom spreads and low volatility in the next three to six months - through the summer."

The catalyst to stir the market from its torpor could be meetings of the US Federal Reserve and European Central Bank slated for September that may yield more insights into when and how fast they start withdrawing support. ECB officials are due to meet on Sept 9, while the Fed convenes later in the month.

The rally in credit spreads has been stalling in recent months as bonds - even in sectors hard-hit by the pandemic like airlines and real estate - revert to pre-pandemic valuations. US investment-grade spreads have moved within about 10 basis points since the start of April and their euro counterparts have barely fluctuated in the same period.

US credit spreads are set to "remain resilient in the summer months" thanks to easy financial conditions and better credit metrics offsetting a mildly hawkish Fed, UBS Group AG strategists led by Kamil Amin wrote in a note to clients on Tuesday. Euro spreads' valuations will find support in accelerating growth and supportive seasonal factors, they wrote.

While bond prices haven't seen sharp fluctuations for a while, the more liquid credit-default swap market suffered a wobble last week as equity markets dropped amid growing anxiety about the spread of Covid-19 variants.

Steven Oh, global head of credit and fixed income at PineBridge Investments LP, believes credit can weather renewed concerns about growth and the impact of virus variants because corporate fundamentals remain "very supportive".

"Credit spread tightening is going to be minimal and it's hard to see a better scenario than coupon rate of return," said Mr Oh, who helps oversee US$133 billion. "We are now treading water and maintaining flexibility for a potential bout of volatility is a prudent approach." BLOOMBERG