Index data provided by Markit Group Ltd
i) Returns to end November, 2019
Bond market returns updated monthly
Not long to go now in order to clip the kind of performance that is the stuff of dreams. We closed November with risk markets having a final session give-up but having garnered some excellent performance this year.
Records have gone in US equities as the S&P is up by over 25% this year so far. The Dax is up there too, the total return index up 25.3%, whilst the FTSE is up only 9.2% this year in comparison (Brexit/political woes), it could be the ‘go to’ equity market in 2020 if Boris Johnson gets his working majority and funds pile back into UK equities in some sort relief trade.
IG credit has made 6.4% so far, HY credit 9.6% and the AT1 market over 14%. The primary market has seen records smashed in IG, they’re closing in on the high yield record (still 2 weeks of business to go) while there has been a stellar recovery in senior bank primary supply. And rates. Total returns are just a shade shy of 8%. Fantastic.
Stay with it into 2020. As those credit strategy calls and decisions are being made, we think there is little reason to change anything. Cliff risk seems remote especially in the US as policy across the board remains accommodative with a dovish Fed amid controlled inflation. It’s a different story in a stagnating Europe, but markets have shown that they can trade a sustained low growth environment.
It’s not going to be anywhere near as good in 2020, but staying slightly long portfolio duration and overweight credit beta will generate positive returns.
We would overweight triple Bs vs single As and overweight single Bs versus double Bs, as well as overweight AT1 versus HY will still work. IG looks rich as does corporate hybrid debt, but these two categories have a natural bid from investors and we would anticipate a stable market albeit with a tightening bias.
MiFID II is HERE
ii) IG & HY Corporate Bond Total Returns (Annual)
iii) Investment Grade Corporate Bond Total Returns (Annual)
iv) High Yield Corporate Bond Total Returns (Annual)