Supply continues to take up the lion’s share of time for credit investors, but volatility seems more likely on the macro front. Macro themes are not causing major swings, but the news was still not great this week, with AstraZeneca’s US vaccine trial still on pause, concerns about potential contested elections increasing, no new stimulus on the horizon from the Fed or Congress, a lack of progress in Brexit negotiations, and no signs of a thaw in US/China relations. Despite the lack of good news, spreads were little changed on the week and volatility remains light compared with equities (Figure 2). To us, this means that the market is in a range that it is comfortable with and it would take material bad news on one of those fronts to push asset prices substantially lower. Of the aforementioned risks, we are paying closest attention to vaccine progress and elections. If the date for an effective vaccine is pushed past 1Q21, we believe that there could be downside from current levels. In addition, volatility may be high in the event of a prolonged election dispute.

Since these are identifiable but difficult-to-predict downside scenarios, we would expect the market to to continue to have a good appetite for risk unless these potential events come to fruition. We still favor investment grade on a risk-adjusted basis considering Fed support, but consistently find that multi-strategy and core plus funds are boosting their high yield allocations in an attempt to capture yield that is non-existent in most fixed income asset classes. Therefore, even though we do not find BBs cheap anymore, we would be surprised if they sold off materially. Loan demand feels more precarious, but with CLO issuance now over $50bn for 2020 and liabilities tightening, the lack of a diverse buyer base is offset by much more modest supply than in investment grade or high yield.