Global fixed income focus - March 2016

The European Central Banks's (ECB) decision to cut interest rates and increase the size of its QE programme set the tone for market sentiment in March, in what was the best month for fixed income assets since last October. The positive sentiment was amplified by dovish comments from US Federal Reserve Chair Janet Yellen, who cited caution going forward. Markets were a lot calmer, with little negative news coming from China. A pickup in crude oil and commodity prices also boded well for risky assets.

• March saw the Markit iBoxx USD Leveraged Loans Index (MiLLi)snap a four month losing streak (November through February). At one point in February, leveraged loans were down nearly 2% YTD on a total return basis.
• The rally in the CDS market may not have been as dramatic as leveraged loans, but it was impressive nonetheless. The Markit iTraxx Europe tightened by 26bps to close the month at 73bps, some 4bps tighter than where it started the year. It was a similar story in European high yield, where the Markit iTraxx Crossover rallied by 104bps to close at 304bps, 11bps tighter than the 2015 year-end level.
• According to Markit iBoxx Corporate Bond Indices, liquid high yield bonds denominated in USD, GBP, and EUR all returned over 3%, reversing the losses accumulated during the first two months of the year. Markit iBoxx " Liquid Investment Grade Index returned 3.1% in March, and Markit iBoxx $ Liquid Investment Grade Index has now returned 3.7% so far this year, the best performing asset class among developed nation corporate bonds.
• Among developed nation government bonds, the commodities rally in March was reflected in the sovereign world as many countries dependent on assets such as oil saw their credit risk fall over the month. The largest tightening in percentage terms was seen in Australian CDS spreads which fell by over a quarter to 36bps. This takes the country's five year spread to within five basis points of it one year lows reported in June of last year.
• On April 1^st, the US Federal Reserve released their version of a proposal that changes the High Quality Liquid Assets (HQLA) rule to allow certain municipal bonds to be treated as Level 2B assets. March's revenue bond issuance of $21.9 billion indicated a continued decline in issuance, with YTD issuance for the sector 27% lower ($50.7 billion YTD) than the same time period last year.
• Several securitised products sectors rallied with the broader credit markets in March. CMBS and CLOs tightened the most, albeit the improvements in most cases are only a retracement to the historically wide levels reported this January.

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