Major asset managers are cutting exposure to riskier corporate debt as a multi-year rally is leaving valuations stretched, the Financial Times reports. BlackRock, M&G, and Fidelity International are shifting into higher-rated or government bonds, warning that credit markets now offer little reward for added risk. The rally, which had been fueled by easing trade-war fears and expectations of deeper Fed rate cuts, could be underpricing risk and reflecting an overly optimistic view on the economy

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What’s priced in now is a “Goldilocks” scenario of steady growth and falling rates, but BlackRock’s Simon Blundell called it a “risk/reward [that] certainly lends itself to a defensive position in credit markets.”

Spreads at crisis-level lows: Credit spreads in the US and Europe have tightened to about 0.8 percentage points over government debt, down from 1.5 ppts in 2022 and near their lowest since the global financial crisis, dragging down their appeal compared to the safer alternative. “Credit spreads are so tight that there’s almost no ability for them to tighten further,” said Fidelity’s Mike Riddell.

Some cracks are emerging, with spreads edging wider amid renewed US-China trade tensions and the collapse of auto-parts supplier First Brands Group. Several leveraged-loan transactions, including a USD 5.8 bn sale by chemicals maker Nouryon, have been shelved, while prices for weaker loans have slipped.

Risk is mispriced: Some managers warn that credit differentiation has vanished. “Not only is the corporate credit market way too tight, it’s also equivalently tight between companies,” Andrea Seminara of Redhedge said, warning that “idiosyncratic risk [...] is completely unpriced.”

Not everyone is turning bearish: M&G’s Ben Lord said all-in yields remain appealing as US investment-grade bonds offer about 4.8%, though he still favors covered and higher-rated financial bonds — the cost of buying into which “is as low as it’s ever been,” he said.

EGX30

37,677

+0.1% (YTD: +26.7%)

USD (CBE)

Buy 47.51

Sell 47.65

USD (CIB)

Buy 47.50

Sell 47.60

Interest rates (CBE)

21.00% deposit

22.00% lending

Tadawul

11,697

+0.1% (YTD: -2.8%)

ADX

10,124

-0.2% (YTD: +7.5%)

DFM

5,992

-0.6% (YTD: +16.2%)

S&P 500

6,664

+0.5% (YTD: +13.3%)

FTSE 100

9,355

-0.9% (YTD: +14.5%)

Euro Stoxx 50

5,607

-0.8% (YTD: +14.5%)

Brent crude

USD 61.29

+0.4%

Natural gas (Nymex)

USD 3.01

+2.4%

Gold

USD 4,213

-2.1%

BTC

USD 107,105

+0.6% (YTD: +14.5%)

S&P Egypt Sovereign Bond Index

947.01

+0.1%(YTD: +21.8%)

S&P MENA Bond & Sukuk

151.76

+0.1% (YTD: +8.4%)

VIX (Volatility Index)

20.78

-17.9% (YTD: +19.8%)

THE CLOSING BELL-

The EGX30 rose 0.1% at Thursday’s close on turnover of EGP 6.3 bn (38.9% above the 90-day average). Local investors were the sole net buyers. The index is up 26.7% YTD.

In the green: EFG Holding (+2.7%), Raya Holding (+2.1%), and Egypt Kuwait Holding -EGP (+1.7%).

In the red: Arabian Cement (-1.9%), Misr Cement (-1.8%), and Qalaa Holdings (-1.1%).

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