Please click here to download the full report.
- Global corporate credit continued its positive run with another strong month in April. Risk-on sentiment
dominated, as evidenced by strong equity, high yield and loan returns
- Risk-on sentiment was bolstered by solid economic data in the US, Europe and China (GDP, unemployment),
good earnings, progress on US/China trade negotiations, and accommodative central bank policy)
- Early in the month, the European Central Bank announced its ongoing willingness to support the Eurozone
economy, highlighting the potential for further stimulus measures if needed later in the year
- We believe going forward, credit is largely a carry trade
US fixed income, with the exception of loans, continued its positive streak this month led by longer duration Treasuries and investment grade corporates. Credit benefitted from strong technicals, specifically robust inflows and light issuance. Most importantly, duration rallied (prices higher, yields lower) on the back of the US Federal Reserve’s (Fed) signaling that it would likely not raise rates in 2019. This begs the question, why has the Federal Reserve adopted a more accommodative stance? Many believe that the Fed is concerned with potential US and global economic headwinds and that they could even cut rates at least once in 2019. We will be watching economic data closely, as well as key geopolitical developments such as BREXIT.
It was another positive month for European credit markets, building on January and February’s gains and rounding off a solid first quarter – in sharp contrast to the end of 2018. In line with other regions, investment grade outperformed high yield in absolute terms on the back of a rally in rates, supported by more accommodative central bank rhetoric. The European Central Bank (ECB) unveiled new action to support the banking system in the form of another Targeted Long Term Refinancing Operations (TLTRO) package, and further postponed its first rate hike after downgrading its 2019 Eurozone GDP and inflation forecasts. German manufacturing data also highlighted ongoing weakness, with the flash purchasing manager’s index falling further in March to 47.7; anything below 50 highlights a contraction. The overall weaker economic tone resulted in a flight to quality by investors with bond yields declining and German 10-year Bund yields moving into negative territory for the first time since 2016. Meanwhile Brexit negotiations continued to weigh on sentiment due to the UK’s ongoing internal political battle to reach a withdrawal agreement, resulting in an extension of the deadline from 29 March to 12 April.
Emerging market (EM) corporates posted another month of solid gains to end the quarter on a strong note, finding support in a more dovish tone by the US Federal Reserve. Investment grade bonds outperformed high yield as rates rallied, and spreads widened as they were unable to keep pace with falling yields. All sectors and most countries produced positive returns with the Asian region producing the strongest performance. This year’s heavy EM election calendar got off the ground with Turkey and Ukraine going to the polls at month end. While the results of Ukraine’s first round were announced at the start of April, in Turkey early results showed that President Recep Tayyip Erdogan and his ruling AKP party had lost control of Ankara and Istanbul – a major setback for the president. Moving to Asia, China’s government bonds made their debut on global benchmarks, which is likely to result in a significant amount of inflows into China’s onshore debt market over time as investors reposition their portfolios accordingly. Within Latin America, the Bank of Mexico (Banxico) left rates on hold for the second consecutive month at 8.25% on growth concerns, in-line with the more dovish tone of other global central banks. Meanwhile Brazil’s long running “Operation Car Wash” investigating bribery and corruption claimed another victim after former president Michel Temer was arrested.