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Credit Where Credit Is Due

03 December 2020
3 Minute Read

Large-scale policy support and prospects of a vaccine breakthrough suggest default rates will peak at lower levels. We’re positive on riskier credit markets with overweight allocations to euro high yield and emerging market sovereign hard currency bonds.



  • Covid-19 has made the largest hole in global GDP in nearly a century. However, the number of bankruptcies has remained surprisingly low so far. Relative to the start of the year, we’re actually down. In contrast, the global financial crisis over a decade ago saw a rapid rise.
  • High yield corporate default rates are rising but they’re nowhere close to the levels of 2008-09, especially in Europe (accounting for a similar starting point relative to the timing of the shock).
  • Perhaps surprisingly, new business formation is increasing in Germany and France, though moderately, and it’s picking up significantly in the US. This may indicate that the economy isn’t structurally impaired. If anything, the data show a remarkable resilience.
  • This milder default cycle has to do first and foremost with governments being able to borrow at affordable rates and spend vast sums, as central banks ensure cheap funding. A safe and effective vaccine soon should allow wider reopening and, therefore, mitigate credit stresses.
  • Earlier this month we dialled up the risk in portfolios by overweighting US equities against US investment grade bonds. We’ve also maintained our credit overweight, with a preference for euro high yield and emerging market sovereign hard currency bonds.

Much has been said and written about the impact of the pandemic on the economic cycle. The focus, understandably, has tended to be on the near-term effects on aggregate demand. Less explored are the longer-term effects on the supply-side of the economy. Should the markets worry about bankruptcies acting as a drag on economic recovery and negatively impacting the credit markets? Turns out, bankruptcies have not spiked this time around (figure 1) – a key difference with the 2008 crisis.

Source: Quintet, FactSet; chart shows median and min/max range (US, UK, Germany, France, Spain, Netherlands, Sweden, Finland, Denmark, Norway, Japan and South Korea)

That is primarily because central banks have kept the liquidity taps wide open to mitigate credit impairment, while ensuring cheap funding for governments to provide large-scale fiscal stimulus. Unless expectations of an imminently available safe and effective vaccine prove wrong – if, for example, the approval process is extended or efficacy does not meet expectations – we believe that bankruptcies should remain below the level witnessed during earlier recessions.

Corporate default rates haven’t risen as much as during the global financial crisis over a decade ago. This can be seen by comparing their trajectories, starting in July 2008 (two months before the bankruptcy of Lehman Brothers) and January 2020 (two months before the lockdowns this past spring). The difference looks particularly stark in Europe, while in the US the trend didn’t seem particularly different initially, though it now appears to be the case there too. Forecasts provided by Moody’s – one of the major credit rating agencies – suggest further increases in the months ahead, but a peak well below that of the global financial crisis (figures 2, 3 and 4).

Source: Quintet, Moody’s forecast (t+0 = July 2008 for global financial crisis and January 2020 for Covid-19 pandemic)   Source: Quintet, Moody’s forecast (t+0 = July 2008 for global financial crisis and January 2020 for Covid-19 pandemic)


Another way of saying this is that the distressed sectors are likely to recover more swiftly this time around, and leave the economy less structurally impaired than the magnitude of the Covid-19 shock would suggest. Importantly, while information isn’t fully comparable and data availability is more limited, it appears that new business formation is rising moderately in Europe and surging in the US (figure 5). This may point to the kind of underlying dynamism that will prove a shot in the arm for the global economy in the months to come.

Source: Quintet, Moody’s forecast   Source: Quintet, national statistics


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Daniele Antonucci

Chief Economist & Macro Strategist

Carolina Moura-Alves

Group Head of Asset Allocation

Bill Street

Group Chief Investment Officer

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