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Rally in credit markets loses steam in March

 Credit markets across both sides of the Atlantic, and beyond had a mixed month and had muted returns within some regions, notably in European High Yield and Emerging Market High Yield markets, both registering gains of 0.08%. Investment Grade credit and sovereign markets ended the month in negative territory in March, both in Europe and the US, for varying reasons.

Whilst the European economy closed off the quarter with a string of positive economic data and an even better Q4 earnings season, the political scenario continued to take its toll on investor sentiment, with the weakness witnessed in peripheral sovereigns dragging corporate bonds in the region lower and spreads on such bonds wider.Despite this, the sharp cost savings by high yield issuers as witnessed by the recent wave of refinancing of bonds previously issued with large coupons placed such high yield bonds

Despite this, the sharp cost savings by high yield issuers as witnessed by the recent wave of refinancing of bonds previously issued with large coupons placed such high yield bonds in a better footing in terms of credit metrics. This coupled with the abundance of liquidity in the market and the persistent search for yield kept prices supported albeit the carry trade was a major contributor for European High Yield returns during the month.

In the meantime, fixed income markets focused instead on renewed expectations that the ECB will maintain a dovish tone for longer, and sovereign yields dropped quickly again. Unsurprisingly, the longer they remain low, the better supported credit remains.

Towards the end of the month, the UK formally handed over notification of its intentions to leave the European Union following the infamous Brexit referendum last June, with the expected date to leave the union being set at 29 March 2019. The event was a clear headline grabber but did nothing to rattle the markets, as it had just become a formality, with valuations clearly pricing in this likelihood.

In the US, the new administration’s failure to thread along with the newly proposed healthcare legislation coupled with its persistent delay in placing climate change regulation high on its agenda has had the market raising eyebrow’s on Trump’s willingness and capability of sticking to and implementing its pre-electoral promises, particularly due to the fact that pre elections were being viewed as market-friendly policies.

More recently, Trump’s relation with North Korea is quickly turning sour and has done little to shed any ray of hope of improving Trump’s market ratings. The slump in the price of oil mainly on the back of intentions by OPEC members to refuse from scaling back on production has been a cause for supply-related concerns, resulting in a slide in the price of oil by over 6% during the month, dragging with it a large portion of the US High Yield market.

The positive momentum witnessed in emerging markets in the first months of the year rippled into the month of March as the pick-up in global economic activity in the developed and emerging economies spurred demand for EM assets.

Trade activity picked up as did inflationary data points across selective emerging market economies whilst investor appetite improved on the back of a marked weaker US dollar. EM were unshaken by the rate hike by the US Federal Reserve earlier on in this month, as this move was pretty much priced in, whilst the weakness in the US dollar towards the end of the month over failed healthcare negotiations pushed EM higher.

The meat scandal in Brazil did little to deter the positivity in the asset class as investors swiftly shrug off the negative news and tread along with the continuous global search for yield.

 

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.  

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