In 2017, market participants were faced with several dilemmas on whether the credit market will uphold the generosity it offered to investors over the past couple of years.
Indeed, this uncertainty was mainly brought about by the wave of monetary easing, which markets were under the impression yet comforted that it had been approaching its end.
That said, once again the asset class per se offered very decent returns, despite the surrounded uncertainty, as investors upheld their search for yield.
It is to no surprise that yields over the past year touched lows, as bond prices continued to increase due to the accommodative stances by major Central Banks.
The main yield tightening was experienced in Europe following the quantitative easing program introduced by the European Central Bank (ECB), which continued to combat the low inflation issue by flooding the market through the QE program.
On the contrary, in line with the rate hikes put forward by the Federal Reserve, we saw some adjustments in US credit, both at a sovereign and investment grade level, but also within the sub-investment grade segment. The said adjustments offered investors the opportunity to dip-in at more attractive levels as opposed to 2016.
Meanwhile, Emerging Markets (EM) continued to top-up on the positive performance registered in 2016, given the fact that the EM region was still offering a higher rate of return as opposed to the developed world.
For the said higher return, investors were happy to add-on more risk to their portfolios by increasing their exposure to EM.
Looking at the performances for the year, as expected, the short-dated sovereign bonds in Europe suffered a minimal loss of -0.253%, while the long end of the curve posted a minimal gain of 0.3%.
The movement in yields is acceptable, given the fact that the market is pricing-in a reduction in QE over the coming months. High yield (HY) bonds in Europe delivered a solid return of 4.8% as per the Markit iBoxx EUR Liquid High Yield Index, as investors held tight to good credit names, which were offering relatively high coupons with lower risks.
Looking at USD HY, the BOFA index closed the year at circa 7.5% gain given the initial volatility in oil prices in mid-June, which put pressure on USD HY issuers. As the price of oil recouped (YTD gain circa 12%) HY yield names experienced a strong return to close-off the year with a very decent return.
EM hard currency bonds, once again were amongst the top performers for the year with gains of close to 8.7%, as investors digested positively the favourable movements in currencies, in addition to the return to growth in terms of GDP of both Russia and Brazil.
Thus, all in all, credit markets gifted investors with another good year. Yes, equity markets delivered a much more solid year, however the credit world year on year maintained its value whilst being less volatile.
Moving into 2018, in my view, the first half of the year should continue to see a relatively stable momentum within the bond market, as investors should hold tight to the carry trade. Undoubtedly, monetary tightening is one of the elements to look at.
However, excluding any systematic shocks we should continue to generate returns through interest coupons. Do not expect much price appreciation, if any. That said, as I have opined in previous writings, there will always be value in bond markets.
Disclaimer: This article was issued by Jordan Portelli, 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.