Investment-grade corporates still managed to deliver a positive return courtesy of the driftdown in government bond yields. High-yield corporates continued to be boosted by investors’ hunt for yield, but were penalised by the correction on emerging markets in late January. Local-currency emerging debt was hit hard by the slump in value of emerging currencies against the dollar and hikes in interest rates. Dollardenominated emerging debt, however, was less affected on account of the driftdown in US T-bond yields.
As issuance volume looks set to diminish over the next few weeks, this should provide some technical support for the European corporate bond market, with demand still favouring financials and borrowers from periphery countries. However, although the reporting season will provide an opportunity for reviewing valuations and reassessing companies’ credit ratings, market sentiment and appetite for risk will be influenced heavily by emerging markets. High-yield corporates remain attractive-looking options even though spreads have narrowed.
The Fed’s move to turn off the liquidity taps and the deteriorating state of several emerging economies look likely to maintain pressure on the emerging-market debt asset class which will be heavily reliant on investor confidence. Discriminating between the various countries may well become increasingly important.
Please find enclosed the latest edition of the Pictet Bond Letter.