At the turn of the year, we had anticipated 2018 to be a topsy-turvy for credit, and anything short of that would have, at least for us, taken us by surprise. So far, this year has lived up to its expectations and is proving to be the most challenging of the past handful of years.
Credit markets have succumbed to pressure for the better part of the year, with concerns flying in from all directions, such as the termination of the ECB’s Corporate Sector Purchase Programme (CSPP), the toing and froing of trade wars and the ongoing differences between all countries in the spotlight, concerns emanating from Italy (on the political front and its resultant budgetary anxieties which have fretted investors, even the fainthearted).
Adding to market woes has been the recent marked weakness in EM assets, mainly emanating from a stronger US Dollar but also as a result of micro concerns such as recent pressures from South Africa, Turkey and Argentina, to name a few. And it has been this concoction of events which has caused credit markets to adversely react to an increase in issuance volumes in the primary markets, with weaknesses being registered indiscriminately across all segments of the rating curve upon any uptick in net issuance.
However, to the relief of many across the credit spectrum, recent trading sessions have provided some form of breather for the credit investor. Equity markets too seem to be stabilising, and yields on sovereign bonds remain anchored for the time being despite the increase in net issuance, whilst the Italian 10-year BTP is comfortably below the 10% level once again. We’re anything but out of the woods though – US rates continue to rise, EM weakness prevails, the USD strength continues to prove its resilience, and market woes continue to prevail.
Market sentiment has been adversely impact by issues such as trade wars, uncertainty around the NAFTA deal, Italy’s imminent budgetary announcements and EM, all of which have weakened credit markets this year. Without this year’s ongoing macro and political issues, we can safely assume that credit would have fared better in the first 8 months of the year. Having said that, we cannot assume that the worst is behind us because following market weakness, we could well see issuers test the markets and subsequently net bond issuance could resume its upward trajectory once again.
Never the less, volatility and bouts of market weakness provide interesting trading and positioning opportunities within credit markets. Prudency and conviction trades however remain the order of the day, as value in the bond market will inevitably emerge once again.
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