Index data provided by Markit Group Ltd
i) Returns full-year 2019
Bond market returns updated monthly
Records went in US equities as the S&P rose by almost 29% in 2019. The Dax wasn’t far behind and whilst the FTSE was up only 10% this year in comparison, it could be the ‘go-to’ equity market in 2020 after Boris Johnson got his working majority following the UK election. An orderly Brexit at the end of January is nailed on and funds are likely going to pile back into UK equities.
A late squeeze, coming in December courtesy of a ‘phase 1’ trade deal between the US and China as well as that majority return for the UK government in the Brexit-election helped push credit returns significantly higher.
That late push helped add to performance in credit, such that IG credit made 6.3%, HY credit 10.7% – and the AT1 market some 15.8% on tightening of 312bp (all iBoxx) for the year. In addition, in the UK, the sterling corporate bond market, already in good shape before the election, tightened some more and this longer-duration market returned 10.8% in 2019 for investors. And Eurozone rates? Total returns fell through the final quarter – from as high as 10% as rates sold off, but still delivered 6.7%. Fantastic!
Credit index followed the trend. Protection costs plummeted in 2019, with iTraxx Main tightening by 45bp to 44bp (notwithstanding modest index changes at the roll dates) and X-Over protection dropped by around 150bp to almost 200bp.
It will be more of the same into the early part of 2020, at least. As those credit strategy calls and decisions are made, we think there is little reason to change anything. It’s not going to be anywhere near as good as it was in 2019, but staying slightly long portfolio duration and overweight credit beta (and financials) will generate decent positive returns for the asset class.
We would overweight triple Bs vs single As and overweight single Bs versus double Bs – and 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 stable markets here, albeit with a tightening bias which sees index spreads for IG close to record tights, by year-end.
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)