Income

With elevated yields and inflation expected to come back to target, we think investors can target a level of real return that was extremely difficult to achieve in the previous cycle.

A lot has happened since our last blog about the state of affairs in the European High Yield (HY) market. At the time, the sector had just seen three of the largest capital structures of Altice France, Ardagh Group and Intrum AB announce restructuring advisors in quick succession, with growing fears that it would represent the start of a wider default trend.

Yesterday the European Central Bank (ECB) delivered a 25 basis point (bp) cut, their second in the current easing cycle and in line with market consensus.

We struggle to recall a more eagerly awaited US labour market report than that published last week. Stakes were high given the previous report showed a steep rise in unemployment and caused market mayhem in early August, but anyone hoping for a conclusive picture was left disappointed as a mixed set of figures left the strength of the US economy open to interpretation.

For any fixed income investors that follow the England football team, the plan for H2 2024 may feel somewhat familiar – no substitutions in the second half.

The global financial crisis was a seismic shock to banking systems globally, and triggered a regulatory marathon with banks having to adapt to a far stricter set of rules (known as Basel III) set out by the Basel Committee on Banking Supervision (BCBS).

In spite of what looks like a quiet week ahead, there are a couple of data releases in the coming days that require close attention, these releases could potentially disturb the fragile calm that we are enjoying in the first trading hours of the week.

The UK’s Office for National Statistics (ONS) released their monthly inflation report this morning. In spite of April’s numbers showing a marked decrease in most inflation measures, it is fair to say that the report was significantly worse than expectations.

Quarter ends are always a useful time to take a step back and assess what the main macro drivers during the quarter were, which trades worked and which did not and to refresh macro views for the next period.

Yesterday was an eventful day for markets. We started off with inflation data in Europe, followed by an earnings release by New York Community Bank that showed large provisions in their commercial real estate loan book, before moving onto the Fed’s Federal Open Market Committee meeting

Last year saw returns in European high yield (HY) of approximately 12%, driven by tighter spreads (-102bps) and lower government bond yields (five-year bunds were -59bps).

We recently highlighted in our 2024 outlook our expectations of significant inflows into fixed income to be an important technical driver of performance in the year ahead.