The rally in credit markets witnessed during the first four months of the year showed no signs of abating during the month of May, with fixed income markets, particularly the higher yielding credit-based sectors within the asset class remained well in demand.

From European to US high yield and emerging market credit, and to a lesser extent European and US investment grade markets, credit remained a better bid for most of the trading sessions within the calendar month, as the global search for yield, within an asset class, which has so far remained robust and offered minimal volatility, intensified.

In an attempt not to miss out on the rally, despite being aware that valuations and spreads appear tight and have been appearing so for quite a while, global investors and investment managers alike sought to jump on the bandwagon and reduce cash holdings for an increased preference in allocation towards fixed income.

Investors are seemingly getting the lowest yields, on bonds within the higher yielding space, such as high yield and emerging markets, in their years which could well explain the level and element of complacency within the markets. Historically, high-yield bonds have, more often than not, closely mirrored performance in equity markets, and the persistent buoyancy being portrayed within equity markets is spreading over onto the fixed income investor.

And this mood and exuberance by investors can be justified not only by the state of the global economy, and the momentum and traction by developed economies such as the US and Germany but also by emerging market economies, but also by the positive traction gained in successive back to back earnings seasons. Apart from healthier balance sheets as well as market dynamics and recovering economies favouring bond issuers, bond issuers worldwide have taken advantage of the low-yield environment and significantly reduced their borrowing costs and extended their debt maturity profiles. So although the credit risk from the investor’s point of view has been reduced over months, market risk remains the prevailing one being faced by investors, and the incessant reduction in carry trade in their fixed income portfolios.

Economic data has been resilient, both in the eurozone and in the US, while manufacturing and services data, as measured by PMIs, have also surprised to the upside. Unemployment in Europe has been creeping lower and has recently fallen to its lowest in almost eight years while US economic data has also remained robust.

To date, emerging market credit has been the clear winner, with the performance witnessed in EM bonds. This was very difficult to ignore, and even more so, harder for an investor not to participate in. Emerging markets have offered a pick-up in yield and spread terms on a like-for-like basis in comparison to similar rated and dated high yield issuers, and with a flat yield curve in developed economies, monies are expected to continue to flow into emerging market credit.

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 Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.