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US and UK 10-year government yields ended December fairly close to their highest levels since the summer peaks yet, but by the end of January, they had collapsed along with bunds to their lowest since April.
These dramatic moves, with yields cascading 30 to 40 basis points in the US, UK and Germany, initially began with another risk-off phase as equity markets tumbled. The more recent declines, however, coincided with a broad recovery in equity markets, reflecting central bank commentary and action with financial markets interpreting a delay to US rate rises, a further extension of quantitative easing by the European Central Bank, further easing in Japan, while expectations of UK rates were pushed out into 2017.
Although not universally poor, data revealed the scale of the fourth quarter economic slowdown while commentary continued to highlight downside risks to global output.
This trend was repeated at the short end with two-year yields declining significantly, especially in the UK, where in just one month all the gains of 2015 were unwound. In such circumstances January returns were exceptional with UK All Maturities gilts gaining 3.9% and those with 10-years plus gained 6%. Local currency returns were not dissimilar elsewhere but another bout of sterling weakness ensured overseas returns were generally far higher for UK investors.
Corporate Debt Recent Trends
US investment grade bond issuance picked up strongly totalling well over $100 billion with some two thirds in A-rated paper. This was principally related to the issue of Anheuser-Busch InBev bonds to finance the purchase of SABMiller. Some $46 billion were sold, an increase from the original $30 billion as more than $100 billion in orders were placed. Nearly all sectors produced much stronger returns than that of the index but overall gains were reduced by losses of 1.7% in basic materials and 3.1% in oil and gas, some 4% and 10% of the index respectively.
January was another month of extreme moves for US high yield bonds with index yields surging to more than 9.6% by mid January, a jump of nearly 100 basis points, taking spreads with them to new cycle highs around 875 basis points according to Citi index data. At this stage, the high yield index had lost 4.5%, with energy the big contributor down 12.5%. The oil price rally alleviated concerns, however, and by month end energy losses were reduced to 8.7%. Even so, most sectors recorded losses and, according to Citi figures, high yield excluding commodities still fell 0.8% over the month.
Elsewhere in investment grade bonds yields fell but spread widened out as governments significantly outperformed in the UK and EU. Both sustained losses in high yield fixed income, with all sectors underwater in Europe.
