March was pretty much a tale of two halves for credit markets. Credit in the Eurozone was better bid in the first half of March on the back of a strong start to QE by the ECB, only to suffer a mild correction at a later stage following a flurry of primary issues in the Eurozone. Meanwhile, in the US, yields retreated in the first half of March as markets were pricing in a June FOMC rate hike, only to be proven wrong following Yellen’s more dovish announcement later on in the month.
ECB’s official announcement of the QE program led to a strong rally in core European government bonds across all segments of the curve, with this positive momentum spilling over to Investment Grade credit and, to a certain extent, High Yield. The notion of €60bn hitting the markets on a monthly basis spurred investor appetite.
This however resulted in a large number of issuers taking advantage of the declining rate scenario and tapping the primary markets, marking March 2015 as one of the most successful for primary issues. This large supply saw investors taking profits, resulting in an uptick in benchmark core European government and investment grade credit yields. It therefore came as no surprise that the market witnessed some volatility as it attempted to adjust to the program and the new supply dynamics.
US companies were also keen on testing the markets with new issues, with Coca-Cola and Berkshire Hathaway a clear testament of this. With earnings season practically over, market focus pretty much shifted on the central bankers' talk, with the March FOMC meeting being the focal point. With US yields on an upward trajectory heading into the meeting, the spread between US and Eurozone yields became even more apparent, so as Yellen dropped her ‘patience’ tone and maintained a very dovish message, thereby lowering the projected path rate, investors sought to take advantage of this and US credit and benchmark bonds had a strong recovery in the latter stages of March.
It is interesting how global growth dynamics have shifted over recent months - the Eurozone has surprised to the upside, as domestic demand has benefitted from lower oil prices and an improving credit picture, whilst, in contrast, US macro data has disappointed of late.
Having said this, we remain aware that the ECB and the Fed will remain key drivers of performance in the coming months. On the one hand, the ECB QE will continue supporting European assets, pushing peripheral spreads tighter while a cautious Fed is expected to provide temporary support to emerging market assets.
Emerging Markets have had a rough start to 2015, with the continuing appreciation of the dollar (negatively affecting those countries that have got a portion of their debt denominated in US dollars), declining price of oil and overall declining demand in global growth, most notably from China and Russia. However, recent dovish comments from the US Federal Reserve’s Chairwoman Janet Yellen may signal a slowdown in the appreciation of the dollar, particularly against Emerging Market Currencies and reduce the risk of portfolio outflows.
Global concerns about weak inflation continue to make headlines, with more than 20 central banks having eased policy so far this year, many in surprise moves. Lower inflation due to commodity-price weakness is having differential effects on oil importers and exporters.
A number of countries and regions have posted stronger-than-expected growth (the Eurozone, for example), but there have been more disappointments (US, China, Brazil) than positive surprises. It is imperative therefore to appreciate that, all-in-all, monetary policy is loose (or easing) in most countries with the ultimate aim of stimulating global growth and propping up inflation and inflationary expectations.
Mark Vella is 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.