Please click here to download the full report.
US fixed income returns were broadly positive with US high yield outperforming loans, investment grade corporates, and Treasuries. Fixed income’s strong returns were primarily a function of favorable technicals – specifically limited net new supply. In the case of high yield, the actual market has shrunk in size given (1) limited new issuance (companies are in their mandated quiet period due to earnings season and so unable to come to market to issue), (2) some companies refinancing in the loan market and others in Europe, (3) limited M&A, and (4) an increase in rising stars (high yield companies upgraded to investment grade). In terms of economic data, earnings have generally been ok, although some sectors were weak as was largely anticipated (retail, select energy). Inflation readings have been weak, prompting many to believe that the Federal Reserve (Fed) may adopt a more dovish tone to future Fed Fund rate hikes. Given the lack of legislation out of Washington (no healthcare, tax, or infrastructure reform has been passed), the Fed may be reluctant to dramatically raise interest rates. With the VIX (volatility) at a 20+ year low, it appears that investors may be a bit more complacent about risk – reflecting another Fed concern over the potential rise of asset bubbles. We believe that in the current environment of tight valuations, investors are well served by a manager who focuses on generating returns while minimizing risk through a research intensive approach to credit.
European fixed income markets generated positive performance across the ratings spectrum, led by high yield. After the sharp rise in yields toward the end of June, government bond markets stabilized in the first half of July and European investment grade corporates resumed their tightening trend. High yield initially underperformed investment grade after a few sessions of negative fund flows and a heavy pipeline of new bond supply. Once the summer supply-lull took over, however, the technicals cleared and the high yield market firmed up. Fund flows in both high yield and investment grade are now stable. In the second half of the month, fixed income markets were buoyed by a more dovish than expected European Central Bank meeting which stood in contrast to the market’s interpretation of Mario Draghi’s speech at Sintra in June.
Emerging Markets (EM) posted positive results with high yield outperforming on the back of risk-on market sentiment. EM returns were driven by continued USD weakness and an upswing in commodities, specifically oil driven by the Saudi pledge to reduce exports and supportive US inventory data. Flows for the month were generally positive after some negative prints in the first half and inflows into EM hard currency bond funds continued. In other news, Brazil’s ex-president Lula was indicted, China posted strong economic data, and the crisis in Venezuela continues. The US placed new sanctions on Russia ignoring the EU’s opposition.