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- The year ended just as it began – with a rally in risk assets. In December, global high yield – and to a lesser degree loans – outperformed all other segments of the fixed income market
- Market sentiment was positive as trade tensions abated with the announcement of a phase-one trade deal between the US and China and diminished Brexit uncertainty following the UK election
- A favorable technical environment (minimal new supply) helped. The new issue market virtually shut down in the second half of the month as is typical in December
- The US Federal Reserve confirmed rates would remain on hold for some time while other EM central banks remained in easing mode with Turkey and Ukraine cutting rates 2%, Russia 0.25% and Brazil 0.5%. ECB remains accommodative
The year ended just as it began – with a rally in risk assets. In December, high yield – and to a lesser degree loans – outperformed all other segments of the fixed income market. CCCs and the energy sector led the way after lagging significantly over the year while Treasuries declined as investors favored risk over safety. High yield benefitted from strong demand for risk assets on the back of a potential China trade deal coupled with Brexit and Fed rate policy clarity. A favorable technical environment (minimal new supply) also helped. The new issue market virtually shut down in the second half of the month as is typical in December. 2019 was a strong year for credit with both high yield and investment grade producing almost identical returns for the period. High yield rallied on the back of risk-on sentiment and a benign rate environment and investment grade benefitted from the favorable rate environment. At their December meeting, the Federal Reserve signaled that they would likely be comfortable holding interest rates steady in the months ahead. While spreads are tight, benign default and rate environments support prospects for a coupon-like year for credit in 2020.
European fixed income returns were mixed this month in terms of total returns, but robust in terms of excess returns, with high yield generating strong positive performance, followed by investment grade corporates. European government bonds yields rose abruptly, prompted by a heavy sell-off at the end of the year as investors sensed a recovery in global growth. Market sentiment was positive as trade tensions abated with the announcement of a phase-one trade deal between the US and China and a reduction in Brexit uncertainty following the UK election. In Germany, signs that the German government might contemplate higher borrowing to help stimulate the country’s economy also contributed to that country’s rapid sovereign sell off. Sovereign bond yields across the eurozone followed the Bund higher, with either stable sovereign spreads— as in France where strikes continue over President Emmanuel Macron’s pension reforms – or higher spreads – notably in Italy where borrowing costs were the highest since June. Earlier in the month, ECB President Christine Lagarde held her first press conference with a message of continued accommodative monetary policy. Entering the new year, we see low rates, an ever-present demand for safe havens, and the quest for yield as key drivers for the credit markets.
The final month of 2019 produced a continuation of strong returns for emerging market (EM) corporates and spreads tightened. Primary activity was slower moving into year end with only US$9.8bn pricing, although this rounded off an annual total of US$489.2bn – a 30% increase from 2018. Risk appetite was boosted by a reduction in geopolitical tensions and dovish central bank monetary policy. The US Federal Reserve confirmed rates would remain on hold for some time while other EM central banks remained in easing mode with Turkey and Ukraine cutting rates 2%, Russia 0.25% and Brazil 0.5%. Macroeconomic data showed a more positive trend with global PMI readings appearing to bottom out amid signs of a pickup in manufacturing. The US/China trade conflict eased after the countries approved a phase 1 trade deal with the US promising not to implement a 15% increase in trade tariffs on US$160bn of Chinese imports and a reduction in a tariff rate imposed in September. In Argentina, newly-elected president Fernandez entered office while the country took steps to avoid another sovereign default after announcing a delay to the repayment on US$9mn of its debt until August 2020. Elsewhere in the region, the IMF agreed a UD$500mn loan to Ecuador as part of a broader rescue package. Ukraine also benefited from an IMF deal with a new three-year, US$5.5bn loan programme. In addition, the country agreed a deal with Russia to ensure gas will continue to reach Europe via Ukraine as well as a prisoner swap, marking a further de-escalation of tensions between the two countries.