Global fixed income focus - January 2016

The sharp drop in China's stock markets at the start of 2016 triggered the largest January decline in global equity markets in history. The weakness in equities drove a flight to quality which spread to the bond market, as investors shunned corporate bonds and other riskier assets in favour of safer government and sovereign debt from developed nations.

• The leveraged loan market started the year in positive territory, unlike high yield bonds, but eventually sold off alongside other risk assets mid-month in the wake of global heightened volatility. The Markit iBoxx USD Leveraged Loans Index (MiLLi) total return declined 0.8% in January, after having dropped 1.0% the previous month.
• The fixed income market volatility carried over to CDS, as spreads hit new yearly wides across every rating category globally. Sector curve data indicates that the global CDS curve is at one of its steepest points over the past year, with AA-AAA basis a substantial 23bps.
• The high yield (HY) bond market was impacted by another fresh downturn in commodity prices and further bouts of risk aversion. The Markit iBoxx $ Liquid High Yield Index has a higher commodity exposure compared with other credit indices, which continues to drive the slide that began last fall, returning a negative 1.2% on the month.
• January's flight to quality sentiment and expectations of rates rising at a slower pace than originally anticipated was apparent in US treasury performance. The Markit iBoxx $ Treasuries Index returned +2.2% in January, which was largely driven by longer maturity US treasuries and the flattening of the yield curve despite a US interest rate hike last December.
• ETF flow data indicates that municipal bond ETFs continue to report steady inflows, with the pessimistic headlines out of Puerto Rico last June driving the only negative flows over the past year.
• January was a challenging month across the broader securitised products market, with few bonds managing to tighten over the course of the month. CLOs and CMBS saw the most price pressure, with below investment grade and equity tranches widening significantly versus similar credits in other sectors.

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