With Q1-16 out of the way, we can comfortably say that for all risky assets (be it equity and fixed income), markets had a bumpy ride – with the selloff witnessed in the latter part of 2015 having a spill-over effect onto the first 6-7 weeks of 2016, after which markets bounced back, quite sharply to say the least. 

The sell-off in US HY was significantly sharper in the US than it was across the pond, and the recovery was likewise sharper. Who would have thought in mid-February that EUR and US High Yield in particular will close off Q1 in positive territory? Hands up those of you who did, I’m pretty sure that no one saw this one coming. 

There were signals however which indicated that valuations became too attractive to disregard – this coupled with the expected accommodative stance from the ECB and more dovish than expected FED spurred the recovery back into the green and have kept bond prices, particularly HY, relatively supported. 

In fact, the European and US High Yield were up by 1.68% and 3.32% respectively YTD during the first quarter of the year and posted a remarkable and noteworthy 3.07% and 3.62% respectively during the month of March where the bulk of the recovery in prices and grinding tighter in spreads took place.

Spreads were dragged down even further during the month as benchmark sovereign yields such as the 10 year German bund and US treasury inched lower with the flight to quality and safety trade well supported in the midst of all the market uncertainty. 

Prior to ECB’s March meeting, investment managers clearly dipped back into the market, adding names which continued to benefit from a solid credit story and appeared to be remarkably under-valued following the January market sell off. Credit funds, with high yield in particular benefited from this stance and we are now witnessing tighter valuations as at the end of March in European High Yield. 

Sure, past performance is no guarantee for future performance…but the performance we have seen in Q1 is testament to what we have been saying since the start of 2016.

Although we acknowledge that we are seemingly nearing the end of the interest rate cycle and that the end of the cycle is being constantly pushed further down the road, we continue to view HY in EUR but especially USD HY (given the huge opportunities there are within EM space following recent FOMC dovishness and USD weakening) in the short-medium term as relatively attractive defensive proposition. 

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.