Following the January 22 QE announcement by the ECB, January closed off the month positively, it would have been difficult to expect such a strong performance in credit markets in the successive month.
February’s results topped markets expectations across both sides of the pond, for different reasons. The positive technical backdrop in the Eurozone (on the back of expected bond purchases) on the one hand, and the large disparity in yields between US and Eurozone yields (rendering US High Yield markets attractive on a relative) basis, prompted investors to reel in funds back in to the High Yield markets, after shunning the said asset class for pretty much a good part of the last six months of 2014.
Furthermore, the monetary easing announced by other central banks (such as Australia, Denmark, Canada, Sweden) further underscored the increasing scarcity of the higher yielding assets and supported the search for yield. This has taken multiple forms with investors moving into (i) longer dated paper (ii) peripheral government bonds (iii) corporate bonds (iv) USD high yield and, to a lesser extent, investment grade or (v) subordinated bonds, such as corporate hybrids.
The Investment Grade markets also had their fair share of the credit rally this year, with the asset class posting the fourth-best month ever. Despite this, the persistent grind tighter coupled with prospects of longer dated IG yields nearing zero, QE-led cash continues to pour in and is pretty much absorbing all the supply the primary markets had on offer.
Investors’ options, with yields so low, is to go for the high beta and subsequently high yielding paper, in the form of conviction trades, or else, within the Investment Grade space, lengthen the maturities of their bond portfolios.
Just to put things into perspective, €36bn worth of Investment Grade bonds globally were issued in February, a good €19bn more than the first two months of 2014. And there doesn’t seem to be any signs of abating, from both sides in terms of supply and demand.
Corporates continue to take advantage of the already low yield scenario by re-financing their debt obligations (or issue more debt) at ridiculously low levels, whilst investors, knowing that the cash being pumped by the ECB needs to find a home, are jumping on pretty much anything, with the primary markets enjoying healthy flows (yields are usually more attractive than secondary markets).
And this in both the Eurozone and the US and US corporates are also re-financing their bonds as we have recently seen a large swing in American companies issuing IG bonds in euros.
For example, last week, Coca-Cola issued the largest IG bond this year so far whilst a recent report has shown that, surprisingly, French companies have been surpassed by US companies in terms of IG issuance so far in 2015.
What next? March marks the start of the highly anticipated QE by the ECB, which has propelled assets within the region higher, but in the interim, we await a number of economic data releases this week, most importantly the latest inflation figures for the eurozone, coupled with the PMI indices, as well as Non-Farm payrolls in the US. Having said that, all eyes will be on the ECB this Thursday, its first adjournment since the famous January meeting.
With the bond purchases about to begin, it is hard to see yields rising anytime soon, so hang on in there, bond prices are expected to remain supported, the low rates and yields environment is set to stay for a long time, and credit stands to gain.
Disclaimer:
This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.