Credit markets show their resilience in February

With February expectedly being a quiet month for central bank activity, investors were not expecting government bonds to be much in the fray. With the looming French and Dutch elections in Europe however, and persistent fluctuations in polls towards pro and anti-Europe parties for much of the month, government bonds were back in demand as the flight to safety trade kicked in once again as European government bonds rallied by 1.1% during the month, with the longer end of the curve bull-flattening. Yields on US treasuries also declined, registering an overall positive performance of 0.5% as the Trumponomics euphoria began to fade, or rather investors acknowledged that it had been overdone.

Credit markets registered a noteworthy performance across both sides of the Atlantic during the month of February as European and US HY markets were up by 1.06% and 1.60% respectively as measured by leading market indices. The political and central bank activity and chatter did little to deter investors to adding more risk to their portfolios, in part aided by robust economic throughout data but also by the positive string of earnings releases. Sentiment in risky assets was upbeat, cash was put to work and credit spreads tightened as improved credit metrics compelled investors to take advantage of the persistent credit grind tighter. Investor’s buoyant mood was also bolstered by a series of credit rating upgrades, something which investors had seemingly forgotten were still achievable and possible.

Emerging markets meanwhile have been unfazed so far this year by the worries, or rather, concerns of a potentially stronger dollar against major emerging market currencies. The expected three rate hikes by the US Federal Reserve appear to be already priced-in in current valuations, and so long as EM currencies continue to range trade within current levels, emerging markets are set to remain in demand. During the month of February alone, global emerging market bonds were up by 1.59%.

The global search for yield continues, the outlook for commodities has improved markedly and without being too euphoric, emerging market economies are in a healthier state than a large number of developed economies, with encouraging prospects for GDP growth in 2017. Meanwhile, inflation has continued to creep upwards, mainly on the back of a rise in commodity and energy prices, so base effects largely contributed towards this uptick in price pressure. Although inflationary pressures could well persist on the back of the robustness in emerging market economies, EM central banks are more likely to oversee the recent spike in inflation rather than respond with any form of policy tightening.