Global fixed income monthly focus - March 2017

The first quarter has ended with record US investment grade corporate issuance, with SIFMA's data suggesting that $468.7bn of corporate debt was sold altogether; 17.9% above the first quarter level in 2016. European markets avoided dislocation from the first of several electoral hurdles this year. In the general election in the Netherlands, the far-right fared considerably less well than suggested in pre-election opinion polls and a conventional"if fragmented"coalition is likely to emerge as a result. The formal UK request to leave the EU also was well discounted, and had limited market impact.

Towards the end of March, the upward trend in bond yields reversed, seemingly catalysed by the new US administration's difficulties in rolling back prior US healthcare legislation. This led market participants to re-evaluate the speed and degree of change under the new administration, and some reversal developed in equity markets, alongside an end to the extended upward trend in yield levels. We assess that this is likely to reflect some "profit taking" and "bargain buying", rather than a major directional reversal.

Heading into April, markets face a significant challenge from political instability in South Africa, where the sudden removal of the Finance Minister and an apparent move to pre-electoral populism led to the country losing its international investment grade rating with S&P, alongside a negative outlook. A further downgrade would bring the country's domestic debt into junk categories, which could lead to significant liquidation risk from international investors who hold a large part of the country's domestic government debt and stock market. Italian banking problems also linger on, with more banks following Banca Monte dei Paschi in seeking state rescue, threatening the status of their outstanding bonds.

• While underperforming last year's Q1 return of 3.42%, the Q1 2017 performance for the Markit iBoxx $ Overall Index managed to stay in the black and deliver a 1.02% return in spite of March's rate hike. For the month of March the return for the USD overall index was essentially flat (-0.04%).
• Leveraged loan telecom sector spreads tightened across all rating categories in February, with North America outperforming Europe.
• It was another solid month for sterling-denominated debt, following on from the stellar performance in February. The Markit iBoxx " Liquid Investment Grade Indexreturned 0.22% in March and has now posted a total return of 1.85% year-to-date.
• The yield basis between 10yr and 30yr AAA municipal bonds widened 5bps to end the month at +80bps, which is near its widest basis of +71bps recorded in December. In addition, the course of events in Puerto Rico during the month resulted in a 15.5% decline in the Puerto Rico 8.0% 7/2035 general obligation bond's price in March, as well as sharp declines across various other entities (Figure 1)
• Securitized product spreads were modestly tighter in March, with several US consumer ABS sectors tightening to the best levels in over a year despite a surge in the sector's new issuance. On the US consumer ABS side, 1-2yr AAA subprime auto paper tightened 8bps to end the month at EDSF +25bps

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