Credit markets were poised for a strong performance in April were it not for the disappointment in the retreat in yields in the last few trading sessions of the month. Meanwhile, the Emerging Markets high yield universe in dollars extended gains lead in the main by the strong recovery in Venezuelan bonds whilst investment grade markets have been less buoyant.
The trend of European and US issuers tapping the euro markets persisted for most of the month with a large amount of multi-tranche deals printed. M&A activity was also quite prominent; Comcast announced plans to drop its bid for Time Warner Cable whilst AT&T’s six-part $17.5bn bond deal to help fund its purchase of DTV was testament that M&A activity is rife. With the weakness in oil prices, the Energy sector began to consolidate with the largest transaction coming in the form of an $80bn bid by Shell BG Group.
Earlier on in the month, Moody’s published its latest default study. The global speculative default rate continued to inch lower, falling to 2.26% in March from 2.31% in February. The European rate, however, increased to 2.16% from 2.03%. Despite this, default rates remain extremely low and are expected to remain so for the next 12 months, with Moody’s forecasting the European rate to rise gently to just 2.6%.
The European Commission’s monthly Business and Consumer survey for April echoed the message that the crisis in Greece might be starting to constrain the euro-zone recovery. Furthermore, the Eurogroup meeting held in Riga half way through the month ended with no agreement on Greece and with chatter that significant differences remain between the Greek government and the country’s creditors. As pointed out by ECB President Draghi, the euro area is now far better equipped to deal with a new crisis. However, he also warned that “we are certainly entering uncharted waters if the crisis were to precipitate”.
Meanwhile, economic data in the US was disappointing too, with retail sales, industrial production and housing data falling below expectations as the market began to abandon the idea of an early rate hike. The US economy all but stagnated in the first quarter, as lower energy prices triggered a big drop in mining investment, but did little to boost consumer spending because of the impact of the unseasonably cold winter in the Northeast.
Credit spreads remain wide by historical standard but yields remain low. Despite there being possible headwinds there still does not seem to be any panic selling; the ECB reaffirmed that it will persist with its QE programme, and the first rate hike in the US is nowhere to be seen. Furthermore, Q1 earnings season has proven to be rather benign so far, supporting credit markets even more.
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.