The first three months of the year yielded positive results for the credit investor, following the lacklustre performance registered during 2019.

There had been many catalysts for last year’s sharp market correction; talks about a US-China trade war, political uncertainty in the Italy, Brexit uncertainty, and a waning global economy.

In this vein, global central banks did little to alleviate investor worries, and it was only till January of this year that both the US Federal Reserve and European Central Bank, followed by other central banks, changed their tone and stance to significantly more dovish than what the market had been expecting for the remainder of the year.

This led to a sharp increase in flows to risky assets, both the higher yielding credits (high yield and emerging markets) as well as equities, resulting in a remarkable performance for the first quarter of the year.

And on this front, April continued where Q1 left off – credit grind tighter in almost every trading session so far this month. Credit spreads are lower for the month, notwithstanding a marginal increase benchmark yields as total returns for the month of April being positive.

This however is not commensurate with this time of the year as usually, trading activity in April tends to be relatively muted with when compared to the first three months of the year, for a number of reasons.

In the first quarter, investors would have already positioned their portfolios and put their money to work early in the year, and are more often than not fully invested when April comes.

Moreover, with earnings seasons around the corner, bond issuance on the primary market tends to slow down, which subsequently results in lower trading activity on the secondary market.

In addition, this time also coincides with holiday season for most exchanges/markets, and with holidays (school holidays in particular), traders and investors tend to move away from their trading screens, which contributes to the slowdown in activity.

So far, this theory can be backed by numbers as IG and HY issues are significantly lower for the month of April than they have been for the first three months of the year.

April has seen a relatively good start to the second quarter of 2019. Risk appetite continues to creep upwards as the risk averse investor shied away with equities posting handsome gains too.

Yields on sovereign bonds across both sides of the Atlantic are marginally higher, and so are benchmark yields, but credit spreads tightened further, positing healthy gains in the first two months of the year.

Financial bonds were also better bid, but at markedly thinner/lighter trading levels with investor sentiment remaining upbeat nonetheless.

This week, economic data activity is expected to be quiet, except for the highly anticipated US 1Q GDP release on Friday, which is expected to point towards the slowest pace of growth since Q1 2017, whilst in Europe, market attention will turn onto the Spanish general election as well as some form of update from UK PM Theresa May’s latest plans to get some kind of Brexit deal through Parliament.

No major upsets, in either direction, are expected this week, but what investors remain wary about is whether the recent rally in credit spreads has further room or whether steam is slowly running out. So far, it is hard to tell, but what seems certain is that the performance of Q1 19 is a tough act to follow.

Disclaimer: This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.


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