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1st January 2020

[Free Content] ᐉ 2020 Outlook: Fortune to Favour the Brave…

MARKET CLOSE 2019:
iTraxx Main

44.2bp

iTraxx X-Over

207.2bp

🇩🇪 10 Yr Bund

-0.19%

iBoxx Corp IG

B+104bp

iBoxx Corp HY

B+345bp

🇺🇸 10 Yr US T-Bond

1.92%

🇬🇧 FTSE 100

7674.56, (+0.85%)
🇩🇪 DAX

13526.13, (+0.72%)
🇺🇸 S&P 500

3329.62, (+0.39%)

There’s some skin left in the game…

It won’t be as exciting in 2020, not least because we will not be looking at 15%+ credit returns from AT1 debt markets, or even close to the 10.7% we saw in high yield – or upwards of 6% in IG. Nor will we be looking at record issuance levels from the IG and HY market. We’re going back to a more normal climate for corporate bond markets. Corporate bonds are meant to be a boring investment:  You know? Buy the bond, clip the coupon, get money back at maturity, invest in the next issue. Welcome 2020.

We should get support for the market from lower levels of IG issuance (-15% versus 2019’s record €320bn), stable to quite likely improving macro and the ECB’s QE related corporate bond purchases. There will be an element of investors being crowded out of IG by the ECB’s manipulative hand (aka 2017), while adding high yield risk as rates (and defaults) remain low for an extended period.

We should be thinking in terms of a little above 1% of total returns in IG – unspectacular (granted!), but the grind tighter will also mean IG spreads are going to close in on their record tights (iBoxx). We could see returns of up to 4% in high yield as a strong bid for higher-yielding paper is sustained through the year. Subordinated debt will be an outperformer again.

So take some risk. We would suggest taking an excess beta portfolio positioning and set up for compression between IG and HY markets (overweighting subordinated debt – both financial and non-financial).

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