Following a harsh start in 2016, the fixed income market spiked in the month of March, following the further monetary easing by the European Central bank, in addition to the dovish stance taken by the Federal Reserve were it failed to hike the Federal fund rate and indicated a reluctance to imminently do so.
On the ECB’s announcement yields tightened across all fixed income classes, primarily within the investment grade front following the surprise announcement that quantitative easing would now be expanded to quality corporate debt.
A week later the Federal Reserve maintained the same line of thought by holding to its easing policy and holding the federal fund rate at the range 0.25 per cent to 0.5 per cent, with a 9:1 voting in favor of an accommodating stance, thus only one member prompting toward an increase of the rate by 25 bps.
Likewise as in Europe, yields in the US were dragged lower at all fixed-income classes, in addition to hard currency emerging market debt which spiked following the gains in their respective currencies against the US dollar.
In March, European High yield debt jumped by 3.7 per cent, supported by tightening sovereign spreads, in addition to declines in credit spreads, as investors shifted their assets in risky attractive debt which had suffered a remarkable sell-off in the initial two months of 2016.
From the US front, in its statement the Federal Reserve noted that activity had been expanding at a moderate pace despite the global volatility experienced in recent months. In addition, inflation did record a pick-up over the past months, however still way below the 2 per cent committee’s target. Thus when considering that the current global turmoil is still posing risks towards a turnaround in growth, the Fed upheld its accommodating stance.
Benefitting from the said stance was primarily the fixed income market which reacted positively, with speculative grade issues recording a jump of 4.4 per cent, while emerging market debt topped the list of best performers by gaining 4.5 per cent. In the latter’s case investors profited from a weakening US dollar and dipped into emerging high yielding debt which is highly correlated to currency fluctuations.
Softness following the accommodative stances within the fixed-income front was barely noted throughout the month, with Yellen’s last statement on Tuesday, in which she reiterated a dovish tone, re-enforcing a strong argument in favour of being long the fixed-income asset class.
The continuous positive data in the US, primarily from the employment front, are pointing towards an improving economy. This is now being reflected in sectors such as the Real Estate market and the retail sector which are showing signs of growth.
In my view, the Federal Reserve is now more concerned with the negative implications of a stronger dollar following a rate hike and thus in its rationale it is factoring in the global scenario rather than acting in isolation.
Undoubtedly, what is certain is that markets are still not ready for an additional rate hike. This was witnessed last Wednesday where equity markets gained ground, while the fixed-income market extended its yield tightening.