Fixed income - monthly strategy update
Fixed Income Senior Investment Director, Alan Cauberghs, covers market movements in September as well as the core investment themes in the global multi-sector strategies, UK and European credit strategies.
September’s news flows were dominated by the latest Federal Open Market Committee (FOMC) statement. Speculation on the Federal Reserve’s (Fed) rate hike decision led Treasury yields to rise prior to the meeting on 17 September, but – to the surprise of many market participants - the Fed announced no change to its headline policy rate. The Fed referenced ongoing below-target inflation in the US, and the potential for further instability in global economic progress, in making its decision.
The decision was initially badly received, as developed and emerging equity markets, as well as certain currency pairs, came under significant pressure. However, the market’s addiction to stimulus shortly kicked in, and expectations built of further easing measures from the Bank of Japan (BoJ), People’s Bank of China (PBoC) and possibly the European Central Bank (ECB).
Treasury yields declined following the announcement and were lower over the month. The 10-year Treasury yield fell from 2.22% to 2.04%. The 10-year gilt yield fell by 20 bps, to 1.76%. The equivalent Bund yield declined from 0.80% to 0.59%, while in France, Italy and Spain, yields in government rates were also widely lower.
In corporate bond markets, US dollar and euro denominated high yield bonds endured a more torrid month. The BofA Merrill Lynch Global High Yield index declined -2.60%, the weakness led by US high yield bonds which fell -2.59%. Euro high yield bonds fell -2.46% and sterling high yield bonds declined -1.03%. Investment grade bonds were more resilient overall. The investment grade BofA Merrill Lynch Global Corporate Bond index rose 0.18% in September, buoyed predominantly by US investment grade corporate bonds, which rose 0.52%. The equivalent euro index fell -0.66% whilst the UK index fell -0.08%.