Bond returns subdued as market awaits ECB/Fed After a relief rally in October, bond returns were flatter last month as investors await the highly anticipated monetary policy decisions from the ECB and the US Federal Reserve in December. European sovereign returns were marginally positive last month as opposed to but USD assets November saw US HY underperform US IG returns by 2.4% as credit risk diverged European ETFs saw inflows across all risky FI classes and Inflation linked bonds. Market overview Among developed sovereigns, European bond returns led the charge in November, albeit by a slim margin. UK gilts were the best performing, returning 1.0% on a total return basis after Bank of England governor Mark Carney stated that he expected interest rates to remain lower for longer. European sovereigns gained further traction in the run up to the December 3 rd ECB monetary policy meeting, after council members bolstered dovish rhetoric last month. German bunds returned 0.2% last month as yields subsequently tightened. Periphery European sovereigns have also benefitted from heightened expectations of further monetary stimulus in the region, with credit spreads tightening across the board. Italian sovereign bonds returned another 0.9% last month to reach 5.6% for the year to date. Conversely, US dollar denominated sovereigns performed negatively with treasuries returning - 0.5%, and USD EM Sovs returning -0.4%, as investors buckle up for an impending interest rate hike. US high yield (HY) decoupled from US investment grade (IG) in November, with the returns differential between the two assets reaching 2.2% as investors traded up the credit quality spectrum. Idiosyncratic risk premium and another fall in commodity prices weighed in on US HY, with $CCC corporate credit spreads hitting new post-financial crisis highs. Elsewhere, European and UK corporates extended year to date gains, with UK HY now up 5.5%. Limited supply and healthy coupon returns have helped bolster returns in the small and liquid market. In emerging markets, Russian sovereign bonds returned 2.2% last month, making it 32.2% for the year so far. Although Russia remains in severe recession and under threat from further oil price deterioration, easing geopolitical tensions and third quarter GDP numbers suggested the worst may be over. Brazilian sovereigns also enjoyed a positive month in terms of investor returns (1.2%), as the country recovers from the damaging effects of political corruption and lower global trade. Inflation-linked bond returns ticked up in November in market expectation that inflation will pick up as aggressive monetary stimulus in Europe and the transitory effects of low oil prices pass. In the US IG corporate bond market, the Basic Materials sector spread widened 11bps, making it the stand out underperformer. $Banks strengthened further, a potential beneficiary of higher interest rates and tight regulation. In Europe and the UK, financials led the charge with the Banking, Insurance and Financial services sector seeing the best returns in November. Markit iBoxx monthly monitor Issue 8, December 2015 Data as of November 31 st , 2015
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Bond returns subdued as market awaits ECB/Fed After a relief rally in October, bond returns were flatter last month as investors await the highly anticipated monetary policy decisions from the ECB and the US Federal Reserve in December.
European sovereign returns were marginally positive last month as opposed to but USD assets
November saw US HY underperform US IG returns by 2.4% as credit risk diverged
European ETFs saw inflows across all risky FI classes and Inflation linked bonds.
Market overview Among developed sovereigns, European bond returns led the charge in November, albeit by a slim margin. UK gilts were the best performing, returning 1.0% on a total return basis after Bank of England governor Mark Carney stated that he expected interest rates to remain lower for longer. European sovereigns gained further traction in the run up to the December 3rd ECB monetary policy meeting, after council members bolstered dovish rhetoric last month. German bunds returned 0.2% last month as yields subsequently tightened. Periphery European sovereigns have also benefitted from heightened expectations of further monetary stimulus in the region, with credit spreads tightening across the board. Italian sovereign bonds returned another 0.9% last month to reach 5.6% for the year to date. Conversely, US dollar denominated sovereigns performed negatively with treasuries returning -0.5%, and USD EM Sovs returning -0.4%, as investors buckle up for an impending interest rate hike. US high yield (HY) decoupled from US investment grade (IG) in November, with the returns differential between the two assets reaching 2.2% as investors traded up the credit quality spectrum. Idiosyncratic risk premium and another fall in commodity prices weighed in on US HY, with $CCC corporate credit spreads hitting new post-financial crisis highs.
Elsewhere, European and UK corporates extended year to date gains, with UK HY now up 5.5%. Limited supply and healthy coupon returns have helped bolster returns in the small and liquid market. In emerging markets, Russian sovereign bonds returned 2.2% last month, making it 32.2% for the year so far. Although Russia remains in severe recession and under threat from further oil price deterioration, easing geopolitical tensions and third quarter GDP numbers suggested the worst may be over. Brazilian sovereigns also enjoyed a positive month in terms of investor returns (1.2%), as the country recovers from the damaging effects of political corruption and lower global trade. Inflation-linked bond returns ticked up in November in market expectation that inflation will pick up as aggressive monetary stimulus in Europe and the transitory effects of low oil prices pass. In the US IG corporate bond market, the Basic Materials sector spread widened 11bps, making it the stand out underperformer. $Banks strengthened further, a potential beneficiary of higher interest rates and tight regulation. In Europe and the UK, financials led the charge with the Banking, Insurance and Financial services sector seeing the best returns in November.
Markit iBoxx monthly monitor
Issue 8, December 2015 Data as of November 31
st, 2015
Markit iBoxx fixed income monthly market monitor \ December 2015
December 2015 2
Fixed income ETFs European and US fixed income ETFs saw inflows in November with IG corporates seeing
the bulk of the new money. Ever growing expectations of strong stimulus in Europe has seen investors pile into European corporates which have seen inflows of $904m in IG and $802 in HY. Inflation linked ETFs in Europe also saw $177m of net inflows. The diverging credit risk among US HY in November was also reflected in ETF flows. US IG ETFs saw positive inflows, while US HY ETFs shed $733m of AUM. US convertible bond ETF inflows also saw a noticeable up tick, with $111m of inflows in November. Among the new ETF launches, Amundi launched several ETFs including the Amundi ETF BBB Euro Corporate Investment Grade UCITS ETF. Euro BBB corporates have been flat this year on a total return basis but may benefit from a region looking to spur growth.
Markit iBoxx fixed income monthly market monitor \ December 2015
December 2015 3
Fixed income market
Facts and figures
Markit iBoxx fixed income monthly market monitor \ December 2015
December 2015 4
Figure 1: Global fixed income market YTD total returns
1.0%1.6%1.4%1.7%
5.6%
2.9%
0.4%
-2.8%
0.2%
2.7%1.6%
5.5%
1.1%2.9%3.0%
32.2%
5.3%7.3%
-0.7%
4.6%
-0.7%
1.8%2.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
US
UK
Ge
rma
ny
Fra
nce
Italy
Sp
ain
US
IG
US
HY
EU
IG
EU
HY
UK
IG
UK
HY
EM
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SD
EM
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Figure 2: Global fixed income market MTD total returns
-0.5%
1.0%
0.2%0.3%
0.8%0.9%
-0.2%
-2.4%
0.7%0.6%
1.8%
0.8%
-0.4%-0.3%
1.2%
2.2%
0.2%
-0.3%-0.6%
0.0%
0.1%
1.2%
0.5%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
US
UK
Ge
rma
ny
Fra
nce
Italy
Sp
ain
US
IG
US
HY
EU
IG
EU
HY
UK
IG
UK
HY
EM
So
v U
SD
EM
Co
rp U
SD
Bra
zil
Ru
ssia
Ch
ina
Ind
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Tu
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Me
xico US
UK
Ge
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Source: Markit iBoxx Data
Sovereigns
Corporates Emerging Markets Inflation Sovereigns
Sovereigns Corporates Emerging Markets Inflation
YTD
Nov
Markit iBoxx fixed income monthly market monitor \ December 2015
December 2015
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Fixed income correlation
Table 1: 1-month correlation Correlation is based on daily returns for the period stated, excluding common holidays Correlation between indices in different currencies is based on unhedged daily returns in USD of the two indices Markit iBoxx CVBX index represents the performance of USD denominated convertible bonds
EUR GBP USD
Sov Corp IG HY Gilts Corp IG HY IL TSY Corp IG HY TIPS
Markit iBoxx fixed income monthly market monitor \ December 2015
December 2015 6
Fixed income correlation
Table 2: 1-year correlation Correlation is based on daily returns for the period stated, excluding common holidays Correlation between indices in different currencies is based on unhedged daily returns in USD of the two indices Markit iBoxx CVBX index represents the performance of USD denominated convertible bonds
EUR GBP USD
Sov Corp IG HY Gilts Corp IG HY IL TSY Corp IG HY TIPS EM Sov