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- It was risk-off in fixed income this November as global high yield and loans declined and high quality government bonds, like Treasuries, Gilts and Bunds generated a strong, positive return
- Dovish statements made by Federal Reserve (Fed) Chairman, Jay Powell, that interest rates were close to neutral, led the 10 year US Treasury yield to decline below 3% for the first time in weeks
- A “truce” was reached at the G20 between the US and China – although it is not an actual agreement and details still need to be worked out
- In Europe, while the Italian budgetary situation remained unresolved, as the month drew to a close there were positive signs that the Italian government was starting to take a more conciliatory approach in resolving its differences with the EU
It was risk-off in fixed income this November as high yield and loans declined and US Treasuries generated a strong, positive return. In-line with the risk-off sentiment, CCCs were the worst performers. While Treasury yields increased at the start of the month, this trend reversed itself as the month wore on. Dovish statements made by Federal Reserve (Fed) Chairman, Jay Powell, (November 28) that interest rates were close to neutral, led the 10 year US Treasury yield to decline below 3% for the first time in weeks. With economic pacing slowing down, markets are forecasting only one future rate increase – likely in December – compared with 3 rate hikes suggested by the Federal Reserve Dot plots. The dot plots are the projections of the rate-setting body (Federal Open Market Committee – FOMC) within the Fed. Each dot represents a participant’s view on where the fed funds rate should be. A “truce” was reached at the G20 between the US and China – although it is not an actual agreement and details still need to be worked out. As of November 30th, the yield on the broad US high yield market (BofA ML US HY Cash Pay Constrained – JUC0) was 7.23%. Given a benign default outlook for 2019, valuations are looking increasingly more attractive.
Political and geopolitical risk continued to take their toll on global credit markets in November. Concerns surrounding the global economic outlook, trade wars, weaker oil prices, Brexit and the Italian budget combined to create a more risk-off environment for all risk assets and liquidity dried up. In Europe, while the Italian budgetary situation remained unresolved, as the month drew to a close there were positive signs that the Italian government was starting to take a more conciliatory approach in resolving its differences with the EU, and BTP spreads rallied. The UK meanwhile continued to be dominated by Brexit, where the government faces ongoing opposition on its proposed deal, despite it being agreed by the European Union. From an economic perspective, there were concerns the Eurozone economy was weakening after posting a 0.2% growth figure in the third quarter. Nevertheless, European Central Bank president Mario Draghi retained his more positive view on the region’s economic outlook, citing a strong labour market, and continued to indicate quantitative easing would finish at the end of the year. In addition, European corporate fundamentals remained robust in both the investment grade and high yield segments of the market.
It was a month of increasing volatility for global risk assets as concerns about the global economic outlook, trade wars, falling oil prices, Brexit and ongoing issues surrounding the Italian budget weighed on credit market performance. However, emerging market (EM) corporates held up relatively well compared to their developed market counterparts. From a regional perspective, Asian corporates produced some of the strongest returns while those in Latin America lagged, brought lower by Mexico. Mexican corporates came under pressure as the central bank revised down economic growth and subsequently raised rates to 8% following newly-elected President López Obrador’s decision to cancel a US$13bn airport project. There were also some concerns around the new president’s ruling style which includes public consultations. However, elsewhere in the region, Brazilian and Argentinean corporates produced positive returns over the month. In Brazil, markets continued to rally following the election of Bolsonaro who began making what appeared to be a number of market friendly appointments to his government. Argentina meanwhile continued on its path of reform as the government announced plans to combat bribery and corruption by placing responsibilities on individuals rather than companies. Conversely, rising geopolitical risks impacted Ukrainian corporates, which were among the weakest performers, after escalating tensions with Russia.