Government bonds received a boost in demand last month as investors’ risk appetite was tested by volatility in equity markets. This risk-off attitude proved negative for corporate bonds, however.
The looming threat of a trade war between the US and China sent shockwaves throughout equity markets last month, as investors braced for the impact of tariffs. The effect was exacerbated by the sell-off in tech companies, following the Facebook data scandal. The social media giant admitted that as many as 87 million consumers may be affected. Sentiment in the wider technology sector soured as investors were forced to contend with the possibility of greater regulatory enforcement in response.
The net result was positive for government debt as investors piled into less volatile markets. In the UK, the yield on 10-year gilts ended the month around 15bps lower at 1.35 per cent, while the yield on the 10-year Treasury ended the month 12bps lower at 2.74 per cent.
For the Eurozone, the yield on the 10-year bund ended the month 16bps lower at 0.49 per cent. Specifically within the Eurozone, Spanish government bonds were the outperformers, after having received an extra boost in the form of a rating agency upgrade. Ratings agency Standard & Poor’s raised Spain’s credit rating to A- from BBB+ in April, in view of the country’s “continuously strong economic performance.”
This risk-off approach in April was predictably negative for the corporate bond sector. Corporate bonds were impacted by a bout of spread widening which hit both excess and total returns for the month. The high yield names were the underperformers once again.
In the UK, high grade corporate spreads ended the month 7bps wider, although total returns stood at +0.61 per cent as they were supported by the move in the underlying gilt curve. High yield names saw spreads end the month 35bps wider, with total returns at -0.28 per cent. Excess returns were negative across the board for the month and total returns were mixed, as both were hit by the widening move in spreads.
It was a similar story in the US where high grade credit spreads were 15bps wider to stand at +116bps. High yield spreads were 31 bps wider at +378bps. Total returns for the high yield sector stood at -0.62 per cent for the month, as a result of this spread widening, and are now at -0.91 per cent for the year to date. Excess returns were all negative for the month, although total returns were mixed given a boost by the move in the underlying Treasury curve.
Euro high grade spreads were 15bps wider in March, standing at +96bps. Excess and total returns were basically negative across the board for March being hit by the spread widening. The High yield sector was the underperformer, with spreads 19bps wider for the month and total returns standing at -0.48 per cent.
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