From what can be evidenced in bond markets over recent weeks, the search for yield phase in the Eurozone remains ever present, despite the glitches witnessed post Brexit referendum as the fresh wave of ECB bond purchases is set to keep yields lower for longer.

The ECB’s problems seem to evidently be structural in nature yet it pursues in its strategy to tackle a number of cyclical solutions, with little effect so far. It could be argued that low rates and especially negative rates may actually have the opposite effect of that intended. Apart from sending yields further southbound, it is clear that the ECB has not yet delivered with respect to tackling inflation expectations.

Despite the glitches witnessed throughout the past 3-4 weeks in the build-up and aftermath of the British referendum, the case for credit markets and further spread tightening, at least within the eurozone remains as overall market conditions remain intact.

Demand is expected to remain supported, as growth remains subdued and inflation remains anchored at low levels, especially given the Corporate Sector Purchase Programme which has not only improved liquidity levels, on the sell side, but the demand of which is positively contributing to bond performance.

Despite the recent bumpy ride, credit markets are proving to be resilient once again. The question looming on investors mind is – for how long?

Market direction becomes ever more important when you consider that year-end performance forecasts for this asset class have been achieved within the first half of the year, for some sub-sectors within the asset class, performance is well ahead of year-end expectations.

Despite low yields, spreads remain historically wide – with technicals still intact, credit is expected to grind its way.

Question marks remain however, as to how sustainable this rally is. There are a handful of risks that could bring an abrupt halt to this rally, but they have only proven to be tail risk in nature so far.

We thought in March that emergence of Greek-related risks could play a role – they were quick to fade away. Brexit has come and gone, and credit seems to be, relatively unscathed (well actually in positive territory). The longer term implications are yet to be reverberated in the wider scheme of things, but till then, credit remains a top performing asset class.

We remain aware that the major economies could continue to register successive periods of lower growth, potentially resulting in a recessionary period, as growth forecasts continue to be downgraded further. However, we are closely monitoring developments in the European banking sector, particularly in Italy, as we believe the ongoing weakness in this sector, if it doesn’t find the necessary support, could provide additional weakness and uncertainty.

This coupled with the imminent lull in summer trading activity could result in a pullback in spreads, but till then, we continue to enjoy the grind tighter, and the accompanying positive performance. The challenge going forward is to consolidate and protect performance. But is it too early to be raising cash or has the rally got more legs?

Tough one, but given the good run we’ve had, I would tread with caution over the weeks ahead.

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.