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What happened last week?
May showed continuing robust sentiment in the credit market, albeit with minor signs of deterioration. US Investment Grade corporate bonds closely mirrored the performance of US Treasuries, ending the month with spreads slightly tighter by 2 bps at 85bps. This stability supported a solid 1.6% gain for the Vanguard USD Corporate Bond ETF. Despite these positive indicators, the US primary market experienced a slight dip in enthusiasm, with new issuance being 3.7x oversubscribed compared to 4.2x in April and a year-to-date average of 3.8x. Nonetheless, 78% of these new issues saw their spreads tighten by an average of 6 bps shortly after entering the secondary market, indicating continued investor confidence. However, a shift in credit quality was noted, as there are now more BBB-rated bonds with a negative outlook than those with a positive one for the first time since 2022. This change points to increasing risk perceptions within the $8.9 trillion high-grade US corporate bond market. In the high-yield segment, the IShares Broad USD High Yield Corporate Bond ETF managed a gain of 1.7%, though the sector saw credit spreads widen by 10 bps to 310 bps. Despite this widening, high-yield new issues were well-received, tightening by 13 bps on average in the secondary market, showcasing a healthy appetite for riskier assets. Across the Atlantic, European credit markets also tightened, particularly benefiting from a partial recovery in CCC-rated bonds. Investment Grade spreads in Europe narrowed by 5 bps to 108 bps, the lowest since February 2022. This tightening helped offset the negative returns driven by rising European interest rates, allowing the iShares Core Euro IG Corporate bond ETF to finish the month up by 0.3%. High beta credit instruments saw notable performance improvements, with the iShares Euro HY Corporate bond ETF gaining 0.7% thanks to a 35 bps tightening in spreads. European corporate hybrids also fared well, benefiting from Moody’s recent methodology updates for hybrid notes, which led to a 0.9% gain. The standout performer in the European credit scene in May was the AT1/CoCo bonds, with the WisdomTree AT1 CoCo Bond ETF achieving a 1.5% gain, highlighting the strong demand for higher-yielding, riskier credit instruments as investors continue to search for attractive returns.
May was a notable month for global treasuries, with significant gains particularly seen in US and UK government bond markets. U.S. Treasuries experienced an excellent performance, aided by less resilient economic activity than expected. The downturn in the US Citi Economic Index and a moderation in US PCE core inflation to 2.75% yoy provided some relief, allowing US rates to stabilize by month's end. The 10-year US Treasury yield saw a decline of almost 20 bps to 4.50%, primarily driven by decreases in US real rates while US breakeven rates fell by 5 bps. This favorable environment led to a strong performance of the iShares 3-7 Year Treasury Bond ETF, which posted a gain of 1.8%, and longer-term bonds rising nearly 3.0%. Similarly, the UK bond market also enjoyed positive outcomes, with instruments such as the BB Series-E UK Govt 1-10 Yr Bond ETF increasing by 0.6% and the Vanguard U.K. Gilt long duration ETF climbing by 0.8%. These gains reflect growing investor confidence and a positive shift in market sentiment towards UK government bonds. However, the scenario was less optimistic in Japan and Europe, including Switzerland. Despite ongoing economic recovery efforts in Europe, inflation rates have started to plateau, which has slightly dampened the prospect for extensive rate cuts in 2024. This sentiment was reflected in the 10-year European swap yield which rose by 5 bps to 2.90%, while core rates such as the 10-year German yield also increased by nearly 10 bps to 2.66%. The month ended with the iShares EUR Govt bond ETF down by 0.3%. In Switzerland, a rebound in economic activity and higher than expected inflation numbers caused the 10-year Swiss yield to increase by 17 bps to 0.93%. The Japanese government bond market faced the harshest conditions, particularly at the longer end of the yield curve. The 30-year Japanese yield rose about 30 bps, ending the month at 2.23%, marking its highest level since 2011. The month concluded with a noteworthy development as S&P downgraded France's sovereign credit rating to AA- late on the final Friday of May, pointing to concerns over a widening fiscal deficit and challenges in implementing fiscal corrections.
Emerging market
May witnessed a commendable performance in the Emerging Markets bond sector, with the Bloomberg Emerging Markets Hard Currency Aggregate Index climbing 1.7%. This rise was underpinned by strong gains across various segments of the market. Sovereign bonds, particularly, leveraged their longer duration to register a notable increase, with the iShares Emerging Market Sovereign Bonds ETF rising 2.6%. Corporate bonds also showed impressive dynamics, with the iShares Emerging Market Corporate Bonds ETF gaining 2%, highlighting investor confidence in the corporate sector of emerging economies. Credit spreads in Emerging Markets corporate bonds continued their tightening trend, decreasing by 15 basis points to close the month at 208bps. This is the lowest level since 2007, reflecting a growing investor appetite for emerging market debt. Additionally, Emerging Markets local debt enjoyed a boost, up 2.3%, primarily due to a weakening US Dollar which enhances the local currency returns for dollar-based investors. In Asia, optimism about economic prospects increased as the International Monetary Fund (IMF) revised its growth projection for China in 2024 to 5% from an earlier forecast of 4.6%. This revision contributed to a robust month for credit in the region. Investment Grade (IG) spreads in Asia tightened by 7 basis points to 78bps, while High Yield (HY) spreads saw a significant compression of 64 basis points to 421bps, signaling strong recovery momentum and investor confidence in Asian markets. Latin America is also witnessing significant political developments with Mexico poised to elect its first female president on June 2. Claudia Sheinbaum and Xóchitl Gálvez, both leading in the polls, represent a significant shift in the political landscape. Sheinbaum, from the left-wing populist governing alliance, is favored to win, which could herald changes in Mexico's economic policies and potentially impact the market dynamics in the region. Furthermore, S&P has upgraded India's outlook to Positive, adding an optimistic tone to the financial environment ahead of the upcoming election. This upgrade reflects improved confidence in India's economic stability and growth potential, although it remains to be seen how this optimistic outlook will align with the electoral outcomes and their subsequent impact on economic policies and market conditions.
