Investment Grade

For fixed income investors, it has been impossible to ignore the proliferation of press coverage about the growth of the triple-B rated corporate bond market, and a coming wave of downgrades for companies rated BBB to high yield, with these ‘fallen angels’ exposing investors to mark-to-market losses at best, and defaults at worst.

In January 2015, after years of market share erosion and leverage increases, Tesco bonds were downgraded to junk status by Moody’s and S&P, forcing all of Tesco’s debt stack out of IG corporate bond indices in the process.

With September now behind us, colder mornings and darker nights approaching it seems an opportune time to take stock of how the primary market reopened this year after its traditional summer lull.

Typically in August, credit liquidity becomes a bit like my lawn this summer: patchy. Over the past few weeks there have been a few stories of large fund groups seeing significant outflows from the asset class, and even of liquidations, which begs the question: what are they selling?

Several times this year we have discussed the benefits of “roll down” in an environment that for fixed income investing is particularly unfriendly. We believe roll down gains will be one of the best ways to protect portfolios in 2018 from the rising rate curves that we have been experiencing so far.

After a volatile fortnight in the market, we appear to be closing this week in a relatively calm manner.

Yesterday, 10yr Gilts closed at 1.510%.  Whilst that individual yield level does not sound particularly significant, in a historical context it is possibly one of the most important month end closing levels I have witnessed in more than 25 years in the markets.

1994 was my first full year in the markets, and what a baptism of fire it was.