- by Suki Mann
A difficult end to the month eventually saw us lose most (if not all) of our performance – from a total return perspective anyway. No major catastrophe or need to panic, but a seemingly major reassessment of where we are following comments by the big three – Yellen, Draghi and Carney.
From a spread perspective, credit remained resolute with investors not panic-selling as the markets elsewhere found new levels, with a reconciliation in valuations in equities and the potential for policy adjustments eventually elsewhere.
The savage back-up in rates undermined performance in fixed income making June’s total return numbers look bad. It was an almost devastating last week of the month in that respect. IG lost 0.5% in June, and HY managed to gain 0.2% (shorter duration and excellent spread performance). The back-up in rates in sterling made up a 1.15% loss in sterling corporates for the month.
Still, for the year to date, we’re in the black. For the first six months of the year investment grade returns are at +0.45% Sterling returns have fallen to +2.7% in the first six months (they were over 4% at end May), while only the HY market has held resolute, returning 3.8% in the year to end June. Euro sovereigns are down 1.15% in the period to June.
Returns data: click here (Charts and analysis)
Issuance levels in June for IG non-financials were a lot better than we might have expected following on from that very good level of supply in May. June delivered €34.5bn of IG issuance against €34.7bn in May to become the third best month for deals this year which has now totalled some €162.6bn in the year to date.
We’re set for a run rate which ought to see us past €250bn for the full year and quite possibly closer to €270bn, seasonality trends included.
In the high yield market, we had a very good month of deals with over €8bn printed versus €3.3bn in May, leaving us at €34bn for the first six months of the year.
Issuance Data: IG | HY | Senior Financials (Charts and analysis)
The first half of 2017 has all been about lifting as much yield as is reasonable. That is, buy the highest yielding product that the portfolio can withstand and run with it. Ignore the gyrations in the rate markets, buy into any dip and run a portfolio positioning comfortably greater than 1.0.
Few would have thought that the spread markets would have delivered as they have, with performance for total return investors sullied only because the underlying through last week came under some severe pressure.
We are looking for a fairly uneventful summer for spread product and only a moderate tightening in the September to December period. IG is 23bp tighter YTD and sterling credit just 4.5bp. We would therefore think that another 30bp of tightening at best in HY cash (120bp so far), another 10bp in IG and 5bp or so in the more volatile sterling markets would seem reasonable expectations over the second half of the year.