Similar to what happened in March, April was all about the build up to the highly anticipated central bank meetings of the ECB and US Federal Reserve. 

Credit spreads in the Eurozone within the HY space tightened during the first two weeks of the month as market participants were eager to scrutinise the expected details of the QE purchase programme announced by the ECB the previous month.

As expectations mounted that the extent of corporate bond purchases would push investors to search for yield by tighter on higher levels of risk by going further down the ladder led to marked spread tightening, and spiked even further post ECB announcement.

To no surprise, there were some bouts of profit taking and the market movement slowed down but risk-on mode was never really switch off during the month. On the back of a remarkable recovery in March, European HY posted robust returns once again during the month of April outperforming IG and equities by registering a satisfactory 1.50% during the month. the yields within the European IG space was volatile as the benchmark rate (10-Y Bund) was notable wider during the month, negatively impacting total returns of the higher rated bonds.

US HY markets as well as Emerging Markets had benefited from the Fed’s dovish tone during the month of March and were further reiterated during the April meeting, having a twofold effect on USD denominated paper.

Expectations of postponed rate hikes in the US proved supportive for US HY as the dovishness kept interest rates and spreads at bay, despite the US economy registering noteworthy positive economic numbers. On the flipside, the weaker dollar propelled a marked shift to emerging market credit as this rendered the funding costs for EM issuers to be cheaper.

Furthermore, the increase in the price of oil over 19% led to an increase in demand for riskier assets, leasing US HY to register a performance of 2.65% during the month of April.

The market’s focus was also on the release of Q1 earnings on both sides of the Atlantic. With earnings expectations significantly lower, particularly in the US, market sentiment was dictated by the magnitude by which earnings beat, met or missed expectations and not by the rate at which declined per se, which is a telling story in itself.

With China’s slowdown not yet out of the woods, a possible saturation in the wave of positive economic data in the US, and the ECB on the back of yet a fresh wave of QE, it is clear that the path of the global economic recovery is at risk.

At the current crossroads, we expect credit markets to trade sideways from this point forth. With issues surrounding Greece and Brexit surfacing and taking further prominence, we do not exclude a fresh wave of volatility over the coming weeks and hence bouts of profit taking and a possible marked correction could be on the cards. With the lower central bank rates scenario expected to linger on, the continuous search for yield play should to continue to favour the asset class.

Has the ‘Sell in May’ catchphrase become a fixation and a self-fulfilling prophecy which is adding volatility in markets ahead of the summer lull?

Historically, investors have sought to lock in gains registered during the first 4 months of the year with the view of dipping back into the market after liquidity conditions in the markets improve. Will this be the case this year again? We cannot really exclude it at this stage but this strategy is not always the winning one. We think that opportunities will arise during May, and would look to add selectively on pullbacks rather than look to completely remove beta and de-risk portfolios, as credit markets remain supportive from a technical perspective. 

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.