WELL BEGUN IS HALF DONE (?)

Euro high yield market started 2018 with a bang, with the first week of the year posting a very positive performance. During the second week markets experienced some rates volatility, initially triggered by fears that the BoJ could start tapering, then exacerbated by reports, later denied, that China was considering reducing its Treasury purchases. Finally, the ECB minutes from the December meeting was the icing on the cake, stating that “ECB could consider gradual shift in guidance from early 2018” and suggesting that, from now on, wording is likely to be changed to cut the link between asset purchases and inflation, paving the way for a receding of the QE regardless of inflation expectations.  As a result Sovereigns sold off, with the 10y Bund yield hitting 60bp, pushing the euro to its highest level since late 2014 to 1.22 against the dollar, while € HY experienced only small downward pressure now reabsorbed.

HIGH YIELD BONDS REACTION

Despite some rates volatility, € high yield bonds held their ground in the green since the beginning of the year, posting better performance if compared to IG and Sovereigns. Best performers in the fixed income space during the last month were definitely lower rated securities, longer maturities and high-beta segments. In the meantime after a quiet first week, primary market started again, with new issues characterized  by strong oversubscriptions driven by investors’ willingness to put their cash at work.

TECHNICALS ARE ON OUR SIDE

The environment as of today appears pretty good in terms of fundamentals and technicals, with appetite remaining strong: primary activity is there but is not overcoming demand, while in terms of fundamentals, according to a Unicredit research, European issuers have proved to be much more disciplined than their US peers, using cash and bond proceeds more to invest in equipment than distributing cash to shareholders, which means less vulnerability in case of rising funding cost and potential improvement of productivity and profitability in the long run.