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2015 started on a strong foothold for fixed income markets as both investment grade and high yield, particularly investment grade, had a remarkable performance as expectations that a fresh wave of Quantitative Easing spurred demand for this asset class. Investors sought to take on additional interest rate risk through the purchase of longer-dated bonds in a marked bull flattening move, and that is why the performance registered so far this year seems to have exceeded many analysts target for the full year.
On the supply front, the primary markets were strong, following a lacklustre end to 2014, with issuance in abundance across both sides of the pond, as issuers sought to take advantage of the favourable market conditions (low rates of refinancing), thereby lengthening their bond maturity profiles. Furthermore, in view of the upcoming asset purchases in the Eurozone, which are expected to have a ripple effect on demand for Investment Grade and High Yield securities, issuers sought to satiate projected future investor demand for credit through the issuance and printing of bonds.
In the US, consensus expectation at the start of the year was for fixed income assets to suffer due to the prospect of a start to US rate hikes. However, with a number of key factors such as sub-par Q4 earnings season, inflationary data disappointing to the downside, and disappointing retail sales, amongst others, led to the backtracking and prolongation of the US Federal Reserve’s expectations of a rate hike, with consensus now being for Q32015.
In Europe, in the run up to the 22 January ECB meeting, European markets rallied across the board, with core European government and Investment Grade bonds leading the gains. Speculation was rife during the early trading sessions of the year for Mario Draghi to give European markets the much needed impetus, and this came with a whopping €60bn monthly asset purchase programme to be stretched over a period of at least 18 months, with the primary purpose of this plan to shore up inflation in the single currency region. This resulted in a marked rally across fixed income assets.
The markets had the Greek elections to contend with the subsequent weekend, with the anti-austerity leftists group led by Tsiparas winning. Investment Grade securities were unfazed by this outcome, as the momentum of the QE announcement was still having its intended effects, however, riskier assets grind tighter came to a halt, as markets expect the outcome of the Greek election to instil greater uncertainty over Greece’s future in the euro-zone and could well threaten to reignite a broader crisis across the currency union.
As we have stated before, Syriza’s victory in the Greek general election may increase the influence of anti-austerity parties elsewhere in the euro-zone, most notably Podemos in Spain. However, the resistance from Germany seems intent on limiting European authorities’ ability to loosen fiscal conditions. With the effects of high unemployment exacerbated by endless austerity, voters have increasingly been drawn to parties promising some relief, in some way or another. Over the weekend, Spain’s Podemos Party held a rally in the streets of Madrid in what is considered to be a fresh wave anti-Europe, anti-austerity popularity. The Podemos party has only existed for a year, but its support has sky-rocketed, gaining support on recent opinion polls.
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