April 2019 - Fixed Income Markets Review

After a strong start to the year, core bond markets in April took a breather and saw mixed results as investors continued to expand equity multiples and push risk-asset indices past all-time highs. The month proceeded without disruption to key positive themes including increased optimism around economic recovery in China, anticipated resolution of the U.S.-China trade conflict and perhaps most importantly, global central banks tilting highly accommodative.

While US Treasury yields rose slightly, strong results in credit shook out a flat result for the US Aggregate Index (+0.03%), which is up nearly 3% year to date. A flat US hedged most of the drag from rising yields elsewhere in global fixed income; ex-US bonds fell roughly 60 basis points despite support from central banks. The global index overall shed approximately 30 basis points, bringing the year-to-date total return figure to 1.90%.

Results were mixed in Europe but overall the rally in sovereigns slowed during April. Italian prices were lifted as Standard & Poor’s affirmed its BB rating (albeit also affirming a negative outlook), and growth surprised to the upside both in Italy and Spain. German bonds fell and UK bonds lost nearly 2% even as the ECB approved a Brexit extension, deferring the immediate possibility of a no-deal departure.

Over the last several months emerging sovereign bonds had taken particular encouragement from the unfolding Fed narrative and its implications for risk appetite as well as the dollar. April, however, saw related currency and commodity impacts work against the segment and the index shed nearly a percentage point. While Fed direction spells an overall solid trend for emerging assets overall, emerging assets are particularly keyed into the dollar, inflation trends and oil prices – all of which strengthened during April. The US termination of sanction waivers on Iran was a major driver of that theme.

Enjoying the risk-on mood and reflecting the opposite side of the oil (and to a lesser extent, inflation) trade was US high yield, which saw spreads narrow further; at around 350 basis points, they stand roughly 30% below their long-term month-end average. High yield has enjoyed an extraordinary recovery so far in 2019, and headed into April the index was matching the S&P 500 Value return nearly bp-for-bp on a one-year basis (the value index pulled ahead marginally in April). High yield’s 1.42% gain in April capped off an 8.78% gain year-to-date and as shown below, the rolling 3-month performance trend is robust even relative to history of big rallies.

Index Returns – all shown in US dollars

All returns shown trailing 4/30/2019 for the period indicated. “YTD” refers to the total return as of prior-year end, while the other returns are annualized. 3-month and annualized returns are shown for:

• The Barclay’s US Aggregate Index, a broad based unmanaged bond index that is generally considered to be representative of the performance of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
• The ICE BofAML Emerging Markets Sovereign Bond Index is a subset of The BofA Merrill Lynch World Sovereign Bond Index excluding all securities with a country of risk that is a member of the FX G10, all Western European countries, and territories of the U.S. and Western European countries. The FX G10 includes all Euro members, the U.S., Japan, the U.K., Canada, Australia, New Zealand, Switzerland, Norway, and Sweden.
• The Bloomberg Barclays Global Aggregate Index, which measures global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.
• The S&P Global Developed Sovereign Bond index includes local-currency denominated debt publicly issued by governments in their domestic markets.
• S&P Eurozone Developed Sovereign Bond - seeks to measure the performance of Eurozone government bonds.
• The S&P Pan-Europe Developed Sovereign Bond Index is a comprehensive, market-value-weighted index designed to track the performance of local currency-denominated securities publicly issued by Denmark, Norway, Sweden, Switzerland, the U.K. and developed countries in the Eurozone for their domestic markets.
• ICE BofAML Emerging Markets Sovereign Bond - tracks the performance of US dollar (USD) and Euro denominated emerging markets non-sovereign debt publicly issued within the major domestic and Eurobond markets.
• The Bloomberg Barclay’s US Corporate Bond Index (AA), which measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.
• The Bloomberg Barclay’s US Corporate High Yield Index, which covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market.
• Bloomberg Barclay’s Global Aggregate Securitized- US Mortgage-Backed Securities, which is a component of the Bloomberg Barclay’s US Aggregate Index and measures investment grade mortgage backed pass-through securities of GNMA, FNMA, and FHLMC.
• Bloomberg Barclay’s Global Aggregate Securitized- US Asset-Backed Securities, which is a component of the Bloomberg Barclay’s US Aggregate Index and includes the pass-throughs, bullets, and controlled amortization structures of only the senior class of ABS issues.
• The Blomberg Barclay’s US Floating Rate Notes (<5 Yr) Index, measures the performance of U.S dollar-dominated, investment grade floating rate notes with maturities less than 5 years.
• The Bloomberg Barclay’s Municipal Bond Index, which measures investment grade, tax-exempt bonds with a maturity of at least one year.
• The S&P/ LSTA Leveraged Loan Index is designed to reflect the performance of the largest facilities in the leveraged loan market.

Key Rates

Key Rates are shown for US Treasurys and London Interbank Offered Rate (LIBOR), the interest rate at which banks offer to lend funds (wholesale money) to one another in the international interbank market. LIBOR is a key benchmark rate that reflects how much it costs banks to borrow from each other. “Current” refers to the percentage rate as of 6/30/2018, while the rates of change are stated in basis points.

Credit Spreads

Credit Spreads shown comprise the Option-Adjusted Spread of the indices indicated, versus the US 10-Year Treasury Yield. “Current” refers to the spread as of 6/30/2018, while the rates of change are stated in basis points.

Key Indicators

Key Indicators correspond to various macro-economic and rate-related data points that we consider impactful to fixed income markets.

• 2s10s (bps)/ 10 Yr vs 2 Yr Treasury Spread, which measures the difference between yields on 10-Year Treasury Constant Maturity Securities and 2-Year Treasury Constant Maturity Securities.
• West Texas Intermediate, which is an oil benchmark and the underlying asset in the New York Mercantile Exchange’s oil futures contract.
• Core Consumer Price Index, which measures the consumer price index excluding food and energy prices. Shown as of the prior month-end.
• Breakeven Inflation: 5 Yr %/ bps, which uses 5-Year Treasury Constant Maturity Securities and 5-Year Treasury Inflation–Indexed Constant Maturity Securities to derive expected inflation.
• Breakeven Inflation: 10 Yr %/ bps, which uses 10-Year Treasury Constant Maturity Securities and 10-Year Treasury Inflation–Indexed Constant Maturity Securities to derive expected inflation.

General Disclosure

This document is intended for informational purposes only and should not be otherwise disseminated to other third parties. Past performance or results should not be taken as an indication or guarantee of future performance or results, and no representation or warranty, express or implied is made regarding future performance or results. This document does not constitute an offer to sell, or a solicitation of an offer to purchase, any security, future or other financial instrument or product. This material is proprietary and being provided on a confidential basis, and may not be reproduced, transferred or distributed in any form without prior written permission from WST. WST reserves the right at any time and without notice to change, amend, or cease publication of the information. This material has been prepared solely for informative purposes. The information contained herein includes information that has been obtained from third party sources and has not been independently verified. It is made available on an "as is" basis without warranty and does not represent the performance of any specific investment strategy.

This material is proprietary and being provided on a confidential basis, and may not be reproduced, transferred or distributed in any form without prior written permission from WST. WST reserves the right at any time and without notice to change, amend, or cease publication of the information. This material has been prepared solely for informative purposes. The information contained herein includes information that has been obtained from third party sources and has not been independently verified. It is made available on an "as is" basis without warranty and does not represent the performance of any specific investment .Some of the information enclosed may represent opinions of WST and are subject to change from time to time and do not constitute a recommendation to purchase and sale any security nor to engage in any particular investment strategy.  The information contained herein has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy. Past performance is not necessarily indicative of future results. Securities and services are not FDIC or any other government agency insured – Are not bank guaranteed – May lose Value.

Besides attributed information, this material is proprietary and may not be reproduced, transferred or distributed in any form without prior written permission from WST. WST reserves the right at any time and without notice to change, amend, or cease publication of the information. This material has been prepared solely for informative purposes. The information contained herein may include information that has been obtained from third party sources and has not been independently verified. It is made available on an “as is” basis without warranty. This document is intended for clients for informational purposes only and should not be otherwise disseminated to other third parties. Past performance or results should not be taken as an indication or guarantee of future performance or results, and no representation or warranty, express or implied is made regarding future performance or results. This document does not constitute an offer to sell, or a solicitation of an offer to purchase, any security, future or other financial instrument or product.