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- Global market fixed income returns were mixed for the month, with positive performance led by European credit (both high yield and investment grade). In the US, high yield and loans managed to eke out positive returns thanks to their spread advantage, but higher-rated fixed income declined
- The markets believe US rates can’t stay low with a very positive economic outlook that potentially generates inflation
- European credit markets delivered relatively solid performance, faring reasonably well in the face of rising US Treasury yields, heightened issuance, and rates volatility
- The commitment of central banks to accommodative policies remains supportive and global economic data released towards the end of the month was clear in its message of strength and recovery
The headwind of rates challenged the broad US fixed income market in March, although high yield and loans managed to eke out positive returns thanks to their spread advantage while higher quality credit underperformed. Rates moved higher on the back of positive US economic data/outlook, an improving vaccine roll-out, solid corporate earnings, accommodative Federal Reserve policy, and potential stimulus. The markets believe US rates can’t stay low with a very positive economic outlook that potentially generates inflation such as we are beginning to see in transportation and raw materials. The key inflation question will be, “Can costs be passed on to end users?” In the case of homebuilders, we see costs being passed along to buyers due to a positive demand/supply imbalance. That is not the case in other industries such as food and consumer goods where strong remote work/lockdown demand is waning as the economy reopens. Eventually, we expect increased US consumer spending to meaningfully accelerate in select industries given pent-up demand due to COVID.
While fears of rising yields and inflationary pressures moved to the fore in March, European credit markets delivered relatively solid performance, faring reasonably well in the face of rising US government bond yields, heightened issuance, and rates volatility. Both European high yield and investment grade credit produced positive returns, but high yield—with its lower duration sensitivity and ability to provide carry—outperformed. The European Central Bank left policy rates unchanged, but increased the speed of its bond buying program to “a significantly higher pace” under its pandemic emergency purchase program to insulate European sovereign yields and spreads from moves in US Treasuries and to further boost the eurozone’s faltering economic recovery. While these measures failed to prevent a rise in the 10-year Bund yield, the Bund remained more range bound than its US Treasury counterpart. Towards month end, eurozone economic data highlighted some more positive economic growth news after flash purchasing manager index (PMI) and German IFO surveys demonstrated a likely resurgence in upcoming business activity, encouraging investors that the reflation trade remains a theme in Europe. On the other hand, lockdown extensions in many countries may alter April data, particularly in service sectors.
Emerging Market (EM) fixed income returns continued to be challenged by rates this month and modestly declined. EM also felt the effects of investor wariness around Turkey and Brazil, as government interference in both regions dampened market sentiment. Brazil contended with an aggressive COVID-19 second wave and President Bolsonaro’s somewhat surprising replacement of the CEO of Petrobras. However, Brazil’s government continues to demonstrate a strong commitment to fiscal reform and to the constitutional spending cap, encouraging investors to stay in the game. In Turkey, market confidence was shaken by the unexpected replacement of its central bank chairman, raising some concerns of a possible return to less orthodox monetary policy. Conversely, EM was bolstered by positive vaccination program news from the US—a key market for EM exports—where lockdown conditions continue to loosen, and from China, which has largely re-opened. Economic data released towards the end of the month was clear in its message of strength and recovery. Central banks worldwide remain staunchly committed in their accommodative policies, which we believe should support EM in the months to come.