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Fixed income returns were mixed for the month on the back of heightened geo-political tensions related to North Korea. As would be expected, Treasuries benefitted from a flight to quality, as investors favored safety, particularly in the wake of President Trump’s “locked and loaded” tweet. Within corporate credit, US high yield declined the most, followed by investment grade and then loans. Equity volatility, which had been approaching multi-decade lows, was higher. Risk assets began to recover as the month progressed. Earnings season wrapped up with companies generally reporting decent figures, with the exception of select troubled sectors like retail and high yield wirelines. We saw significant new issuance come to the market as issuers wanted to get deals done in advance of the quiet that settles in late August. Unlike past months that featured generally higher quality issuers, this month’s issuance was a mixed bag in terms of quality and performance. Two highly leveraged LBOs (Staples and ClubCorp) came to market and struggled to gain traction without structure changes or pricing increases. Cash-flow negative Tesla also came to market, representing a departure from the generally cash-flow positive, solid issuers that have characterized the market’s recent new issues. None of these deals performed well on the break. Trading volumes were low given the August lull and we expect little issuance for the remainder of the month. Global central bankers including Janet Yellen and Mario Draghi will convene in Jackson Hole, Wyoming later this month to discuss future rate policy. We will be watching Yellen’s comments closely for guidance on the passive unwinding of the US Federal Reserve (Fed) balance sheet (the Fed had stated it would unwind Quantitative Easing by allowing bonds to mature and run-off and not re-invest the proceeds). Assuming no geo-political shocks over the next several weeks, in September investors will look to legislation on taxes, fiscal and, potentially, healthcare policy. The Fed and European Central Bank (ECB) will be meeting as well, however, markets are not anticipating rate increases given muted inflation readings.
European fixed income markets were broadly positive, led by high quality European government bonds. Markets were generally quiet as many market participants are on holiday. The first 10 days of August were characterized by a rates rally (yields down) partly driven by heightened political concerns as well as more dovish comments from the ECB. Investment grade performed particularly well over the first half of August as it benefited both from rates rallying as well as spread tightening. High yield experienced some spread widening in the face of political concerns between the US and North Korea. While supply had been slowing down over the summer months, demand continued to be strong into the first few weeks of August, but has also been slowing down most recently as the holiday season is taking hold. We expect the market to be quiet for the remainder of the month with expectations of the new issue market reopening in earnest in September (a number of new deals are already expected to be in the pipeline). Investors are paying close attention to any signs that central bank policies might become less accommodating.
Emerging Markets (EM) posted modest positive results despite the recent risk-off market sentiment caused by rising tensions between the US and North Korea. EM returns were driven by Argentinean paper that outperformed following the victory of president Macri’s coalition in the national primaries last weekend. In South Africa, President Zuma survived yet another confidence vote while Brazilian President Temer escaped a corruption trial and will now focus on reforms to improve the country’s finances. In Asia, the IMF has revised China’s growth outlook upwards to 6.4% between 2017 and 2021 from 6% previously and encouraged the country to continue its deleveraging efforts. EM inflows have been resilient with both EM equity and bond funds seeing small inflows in the first half of the month.