High yield and emerging market bonds continue rally

Size: px

Start display at page:

Download "High yield and emerging market bonds continue rally"

Agnes Allison
6 years ago
Views:

1 Markit iboxx monthly report April 216 High yield and emerging market bonds continue rally April saw corporate and emerging market bond returns continue to gain amid a calmer economic backdrop. Calmer markets have seen HY and EM bonds continue to post gains throughout April Asian US dollar denominated HY and IG bonds have returned 8.2% and 4.8%, respectively, so far this year. ETFs tracking investment grade bonds saw over 5% of new inflows into all FI ETFs Market overview Continued appetite for risky assets was the overriding theme in fixed income markets in April. Emerging markets (EM) continued to outperform this year thanks to a stagnant US dollar, while further improvement in crude oil and commodity prices spurred on high yield (HY ) bonds. Monetary policy expectations have been a major driver of fixed income risk sentiment over the past year and all three major developed nation central banks were in action in last month. The European Central Bank (ECB) revealed details of its corporate bond buying programme (CSPP), the US Federal Reserve remained cautious on interest rate hikes and the Bank of Japan decided not to take interest rates into more negative territory. All three central banks set an accommodative tone. Sovereigns quiet Unsurprisingly, developed nation government bonds underperformed in April as investors shifted to riskier assets. According to Markit s iboxx indices, US treasuries returned -.1% on a total return basis, outperforming safe haven peers UK gilts (-1.3%) and German bunds (-.9%). Peripheral European government bonds underperformed, with Italian government bonds shedding 1.4% on a total return basis. Linkers flat for month Bonds protected by inflation had a mixed month despite rising commodity and crude oil prices. UK inflation linked gilts were the major underperformer as sterling strengthened after US president Barack Obama helped ease Brexit fears. UK inflation linked gilts have however, returned 3.6% so far this year, while US treasury inflation protected securities (TIPS) have returned 5.2%, adding.1% in April. Corporate s surge Total Return iboxx $ Treasuries iboxx $ Corporates 93 April proved a continuation from March as calmer global financial markets provided the backdrop for corporate bonds to rally. HY bonds in dollars (US) returned 3.36% in April, the best performing region. US HY bonds have now returned 6.8% so far this year, having been down more than 5% in mid-february. Sterling (UK) and euros (EU) HY returned.9% and 1.9%, respectively.

2 Investment grade (IG) bonds in the UK returned.7% in April, and US IG has now returned 5.1% so far this year, outperforming US treasuries by 1.9%. Sectors continue to post gains While unrivalled to March s broad based rally in corporate bonds, April saw the majority of sectors post positive returns. In dollars, further gains in commodity prices saw the Basic Materials and Oil & Gas sectors return 3.2% and 3.1%, respectively. They along with the Telecoms sector are the best performing so far this year. European corporates were more subdued, after rallying significantly the previous month. The Markit iboxx Insurance index returned 1.5% in April, the best performing European sector for the last two consecutive months. Contingent convertible bonds also saw returns recover after a terrible start to 216, but they remain 3.48% in the red. Brazil leads EM A stagnant US dollar has seen EM currencies continue to recover. A stronger fiscal outlook has seen credit risk abate in the region, advocated by Argentina s return to international bond markets. Dollar denominated sovereign and corporate emerging market bonds returned 1.5% and 1.8%, respectively. In local currency, the stand out performer was Brazil, with the Markit iboxx GEMX Brazil index gaining 4.5% on a total return basis in April, making it 14% for the year so far - the impeachment of President Dilma Rousseff proving to be a key catalyst. Asian yields slide Local currency Asian bonds have seen their yields continue to slide with new 12-month lows (3.39% on April 5 th ). The Markit iboxx ALBI index now yields 3.42%, 6bps lower than in October last year. Yield (%) Markit iboxx ALBI 3. Apr/15 Jul/15 Oct/15 Jan/16 Apr/16 Returns have subsequently been spectacular this year, with Asian US dollar denominated HY and IG bonds returning 8.2% and 4.8%, respectively so far this year. Fixed income ETFs Fixed income ETFs saw over $7.5bn of inflows in April led by ETFs tracking IG corporate bonds ($4.7bn). It takes inflows just shy of $5bn globally for 216 as passive index investing continues to gather popularity. Despite outperforming on a total return basis, US HY bonds saw $378m of outflows in April; suggesting investors may have seen the best and are starting to withdraw from the asset class.

3 US UK Germany France Italy Spain US IG US HY EU IG EU HY UK IG UK HY EM Sov USD EM Corp USD Brazil Russia China India Turkey Mexico US UK Germany US UK Germany France Italy Spain US IG US HY EU IG EU HY UK IG UK HY EM Sov USD EM Corp USD Brazil Russia China India Turkey Mexico US UK Germany Markit Fixed Income Research Asset class overview Sovereign (unless stated) Year to date 16.% 14.% 14.% 12.% 1.% 9.4% 8.% 6.% 4.% 2.% 3.2% 3.9% 2.9%2.7% 2.1% 1.3% 5.1% 6.8% 3.6%3.7% 2.8% 2.9% 6.6% 5.9% 5.9% 1.6% 4.1% 4.% 5.2% 3.6% 3.4%.% April % 4.4% 4.% 3.% 3.36% 3.2% 2.% 1.%.% -1.% -2.% -.1% -.6% -.9% -1.3% -1.3%-1.4% 1.3%.35% 1.9%.7%.9% 1.5% 1.8% 1.1% 1.1% -.3%.9%.%.2% -3.% -2.4%

4 Tables - Euros Markit iboxx Index Total Return Yield OAS Bonds Duration Month YTD Current Month YTD Current Month YTD Overall -.7% 2.22%.93%.12% -.28% , Sovereigns Germany -.91% 2.87%.39%.12% -.35% France -1.25% 2.7%.79%.15% -.29% Italy -1.4% 1.26% 1.56%.21% -.9% Spain -.64% 2.6% 1.54%.13% -.2% Portugal -1.14% -2.38% 2.87%.22%.55% Ireland -.98% 1.5%.84%.16% -.17% Corporates Corporates.35% 2.78% 1.34% -.4% -.44% , Corporates A.14% 2.44% 1.1% -.1% -.39% Corporates AA -.6% 2.76%.83%.1% -.45% Corporates AAA -.7% 3.48%.96%.2% -.42% Corporates BBB.66% 3.11% 1.75% -.1% -.52% Financials.44% 1.83% 1.45% -.4% -.26% Banks.26% 1.45% 1.18%.1% -.19% Insurance 1.53% 2.86% 2.86% -.28% -.38% Non-Financials.27% 3.5% 1.28% -.4% -.56% Basic Materials 1.24% 6.97% 1.44% -.32% -1.74% Consumer Goods.22% 3.22% 1.21%.4% -.45% Consumer Services.17% 3.53% 1.31% -.27% -.66% Health Care -.3% 2.98% 1.11%.2% -.43% Industrials.19% 2.88%.98% -.6% -.5% Oil & Gas.52% 4.41% 1.6% -.2% -.56% Technology -.12% 3.68%.97%.3% -.45% Telecommunications.1% 3.3% 1.44%.% -.45% Utilities.3% 3.11% 1.32% -.3% -.47% Covered -.1% 1.57%.42%.3% -.29% High Yield High Yield 1.93% 3.6% 4.46% -.52% -.84% High Yield B 1.76% 2.76% 6.45% -.54% -1.1% High Yield BB 1.9% 4.1% 3.33% -.71% -1.3% High Yield CCC 4.1% -.22% 18.88% 5.69% 6.5% Inflation-linked France Inflation-Linked -.24% 3.1% -.53%.2% -.4% Germany Inflation-Linked.2% 3.37% -.77% -.4% -.46% Italy Inflation-Linked -.61% 1.17%.59%.8% -.11% ABS Europe ABS 1.62% 6.45% 788 Contingent Convertible Contingent Convertible.81% -3.48% 7.35% -.8% 1.56% 3 4.1

5 US dollar Markit iboxx Index Total Return Yield OAS Bonds Duration Month YTD Current Month YTD Current Month YTD $ Overall.35% 3.78% 2.6% -.1% -.47% Sovereigns $ Treasuries -.15% 3.21% 1.93%.5% -.39% $ Treasuries 1-3Y.2%.91%.78%.3% -.3% $ Treasuries 3-5Y -.7% 2.35% 1.13%.5% -.46% $ Treasuries 5-7Y -.11% 3.49% 1.46%.5% -.5% $ Treasuries 7-1Y -.17% 4.42% 1.73%.4% -.48% $ Treasuries 1-15Y -.2% 5.18% 1.96%.4% -.46% $ Treasuries 15Y+ -.59% 7.73% 2.57%.5% -.38% Corporates $ Corporates 1.32% 5.11% 3.71% -.16% -.63% , $ Corporates A.93% 4.34% 3.36% -.9% -.47% $ Corporates AA.69% 4.14% 3.1% -.9% -.55% $ Corporates AAA.73% 5.18% 3.16% -.1% -.48% $ Corporates BBB 1.95% 6.24% 4.27% -.26% -.79% $ Banks.75% 2.71% 3.38% -.1% -.34% $ Basic Materials 3.17% 9.28% 4.37% -.55% -1.69% $ Consumer Goods 1.1% 5.37% 3.33% -.9% -.55% $ Consumer Services 1.48% 6.96% 3.8% -.14% -.67% $ Financials.82% 3.2% 3.47% -.11% -.37% $ Health Care.75% 5.55% 3.42% -.7% -.55% $ Industrials 1.19% 5.51% 3.46% -.12% -.64% $ Insurance 1.16% 3.67% 4.6% -.17% -.39% $ Non-Financials 1.61% 6.31% 3.81% -.19% -.75% $ Oil & Gas 3.14% 7.4% 4.56% -.45% -.98% $ Technology.79% 5.2% 3.34% -.6% -.56% $ Telecommunications 1.42% 7.51% 4.1% -.14% -.69% $ Utilities 1.8% 6.46% 3.98% -.18% -.6% High Yield $ Liquid High Yield 3.36% 6.79% 6.97% -.66% -1.14% Inflation-linked $ TIPS Inflation-Linked.4% 5.18%.34%.% -.58% Emerging Markets $ EM Sovereigns 1.55% 6.6% 5.13% -.15% -.66% $ EM Corporates 1.79% 5.89% 5.5% -.26% -.88% Loans $ Leveraged Loans 2.2% 3.57% 1193 RMBS $ US RMBS Seniors 1.89% 1.43% 32 Convertible $ CVBX 2.84% -1.95%.28% -.82% -.63% Contingent Convertible $ Contingent Convertible 2.4% -.15% 7.68% -.32%.56%

6 Sterling Markit iboxx Index Total Return Yield OAS Bonds Duration Month YTD Current Month YTD Current Month YTD Overall -.84% 3.74% 2.33%.11% -.3% Sovereigns Gilts -1.29% 3.87% 2.2%.13% -.29% Gilts %.52%.5%.13% -.21% Gilts % 1.87%.8%.18% -.38% Gilts % 2.82% 1.5%.14% -.46% Gilts % 3.37% 1.49%.19% -.37% Gilts % 3.96% 1.87%.17% -.24% Gilts % 6.12% 2.3%.12% -.27% Corporates Corporates.69% 3.65% 3.62% -.5% -.32% Corporates A.51% 3.52% 3.53% -.3% -.29% Corporates AA.39% 4.14% 2.94% -.5% -.41% Corporates AAA -.51% 6.42% 2.6%.5% -.38% Corporates BBB.94% 3.61% 3.96% -.8% -.31% Banks.36% 1.66% 3.68% -.2% -.8% Basic Materials 2.47% 1.27% 4.11% -.3% -1.27% Consumer Goods.38% 3.71% 2.84% -.2% -.5% Consumer Services.71% 4.75% 3.37% -.6% -.43% Financials.53% 1.92% 3.84% -.4% -.12% Health Care.17% 6.25% 3.32%.1% -.41% Industrials.54% 4.81% 3.25% -.3% -.41% Insurance 1.2%.75% 4.91% -.1%.7% Non-Financials.79% 4.8% 3.52% -.5% -.42% Oil & Gas.33% 2.24% 3.25% -.1% -.19% Telecommunications 1.42% 6.3% 3.67% -.13% -.53% Utilities.85% 4.48% 3.74% -.5% -.34% Collateralized Collateralized -.35% 3.47% 3.31%.7% -.27% Covered -.81% 2.63% 2.47%.15% -.27% ABS -.4% 2.93% 3.5%.3% -.2% MBS -.42% 3.28% 3.22%.9% -.3% Housing Associations -.4% 5.79% 3.71%.2% -.32% High Yield High Yield.85% 2.88% 5.94% -.14% -.17% Inflation-linked Gilt Inflation-Linked -2.43% 3.56% -.86%.1% -.17% Contingent Convertible Contingent Convertible 1.29% 2.76% 7.62% -.13%.86%

7 Charts Euros Yield (%) iboxx Corporates iboxx Eurozone. Mar/15 May/15 Jul/15 Oct/15 Dec/15 Feb/16 Apr/ Total Return 12 iboxx Corporates iboxx Eurozone 9 Mar/15 May/15 Jul/15 Oct/15 Dec/15 Feb/16 Apr/ ASW asset swap spread) 25 Corporates AAA Corporates AA 2 Corporates A Corporates BBB Curve steepness s1s 1s3s 2 US dollar Yield (%) iboxx $ Treasuries 1. iboxx $ Corporates.5. Total Return iboxx $ Treasuries iboxx $ Corporates

8 ASW asset swap spread) $ Corporates AAA $ Corporates AA $ Corporates A $ Corporates BBB Total Return Corporates Gilts Curve steepness s1s 1s3s 2 Sterling ASW (asset swap spread) 35 Corporates AAA Corporates AA 3 Corporates A Corporates BBB 25 Yield (%) Corporates Gilts.5. Curve steepness s1s 1s3s 2

9 Asia yield (%) Markit iboxx AHBI 1. Markit iboxx ADBI High Grade Index. Apr/15 Jun/15 Aug/15 Oct/15 Dec/15 Mar/16 Total Return 1% 8% Markit iboxx AHBI Markit iboxx ADBI High Grade Index 6% 4% 2% % -2% Jan/15 Mar/15 May/15 Jul/15 Sep/15 Nov/15 Jan/16 Mar/16 Yield (%) Markit iboxx ALBI 3. Apr/15 Jul/15 Oct/15 Jan/16 Apr/16

10 Fixed Income ETF flows ($m) Apr-16 YTD Type Europe* USA* Asia* Total Europe* USA* Asia* Total Broad Market 96 2,82 (2) 2, , ,768 Sovereigns 218 (2,888) 3 (2,639) 4,247 6,124 (376) 9,994 Sub-Sovereigns , ,11 Corporates IG 2,878 1, ,675 5,663 6, ,613 Covered (7) (7) 319 (1) 318 Convertible (4) (291) (155) High Yield 637 (378) 258 2,184 4,96 7,9 Loans Asset Backed ,36 1,36 CDS (5) 65 Inflation 495 1,168 (2) 1,662 1,7 3,15 2 4,717 Money Market (922) (822) (4) (1,695) (1,698) Preferred Stock ,936 (2) 1,916 Yield-Curve Strategy Total 4,423 3,997 (856) 7,564 14,963 36,792 (1,982) 49,774 Neil Mehta Fixed Income Analyst Markit Tel: neil.mehta@markit.com For further information, please visit The intellectual property rights to this report provided herein is owned by Markit Group limited. Any unauthorised use, including but not limited to copying, distributing, transmitting or otherwise of any data appearing is not permitted without Markit s prior consent. Markit shall not have any liability, duty or obligation for or relating to the content or information ( data ) contained herein, any errors, inaccuracies, omission or delays in the data, or for any actions taken in reliance thereon. In no event shall Markit be liable for any special, incidental, consequential damages, arising out of the use of the data. Markit is a trademark owned by the Markit group. This report does not constitute nor shall it be construed as an offer by Markit to buy or sell any particular security, financial instrument or financial service. The analysis provided in this report is of a general and impersonal nature. This report shall not be construed as providing investment advice that is adapted to or appropriate for any particular investment strategy or portfolio. This report does not and shall not be construed as providing any recommendations as to whether it is appropriate for any person or entity to buy, sell or hold a particular investment.

Corporate bonds resurgent in March

Corporate bonds resurgent in March Markit iboxx monthly report March 216 After a volatile start to the year, fixed income returns bounced back in spectacular fashion with corporate and emerging market