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US fixed income returns were mixed for September-to-date with high yield and loans outperforming both investment grade corporates and US Treasuries. Despite a series of negative headlines ranging from North Korea nuclear tests to a series of hurricanes battering the Caribbean and southeast US, risk assets (both equities and high yield) outperformed while Treasuries declined. It appears that a sense of complacency has set in as investors look past the negative headlines to focus on generally positive global economic data. The new issue market has been generally active with several smaller new deals coming to market. These new deals saw significant investor interest. Flows have been generally neutral, switching between weekly inflows and weekly outflows. It is important to emphasize that these flow figures represent the retail investor. This sentiment is not universal though as we have anecdotal evidence that some institutional investors have been increasing their exposure to the asset class. Investors are now shifting their sights to the 4th quarter. What will earnings look like? Will a tax bill move forward? What about healthcare reform? Will the Federal Reserve continue to maintain its highly accommodative stance given sluggish inflation?
As was the case in the US, European fixed income returns were mixed for the month-to-date with high yield outperforming investment grade corporates as well as Bunds and Gilts. European risk assets in general (high yield and equities) strongly outperformed all other segments of the fixed income market. The Bank of England (BOE) met and, with UK inflation data continuing to outstrip the monetary policy committee’s target, Gilts have been the underperformer as the market begins to infer a rate hike by year end. The European Central Bank (ECB) also convened, leaving policy unchanged. The ECB minutes were interpreted more dovishly as the Council chose to defer any decisions on further tapering of quantitative easing until their next meeting. Eurozone headline inflation data came in broadly as expected by the market. Issuance has been strong in both investment grade and high yield after a short summer lull in August.
September month-to-date has been solid so far for Emerging Market (EM) countries and sectors despite the increase in US Treasury rates (prices down) on the back of US inflation data. Given risk-on market sentiment, commodities outperformed, as did countries like Brazil and Russia. We saw significant new issuance across most of EM, not only by existing issuers, but also by first time issuers wishing to take advantage of market pricing (cheap funding). EM economic activity continues to pick-up. For example, Chinese data was supportive with a rebound seen in imports while Turkey posted firm GDP data which led to positive growth forecast revisions. Lastly, inflows continue to be positive, supporting the strong performance seen month-to-date.