Weekly Market Update – 30.01.2019

Weekly Market Update – 30.01.2019

 

Emerging Market bonds continue to deliver good returns due to growth fears

• The US shutdown is over before it might restart. The US treasury yield curve went lower between 2bp to 4bp. The whole yield curve flattened further while the bond prices went further up. The recession risk has risen and the US GDP growth will be reduced by around 0.2%
• US corporate high yield bonds have gained 3.8% since the beginning of the year. Emerging market bonds are as well up around 3.3%. Both return figures show that around half of what on average can be expected in one year was achieved in just one month. We believe forward looking that these benchmarks cannot continue to deliver such high monthly returns.
• We see interesting spreads and new issues in the two to four year bucket for  emerging market bonds.
• The US high yield market is compared to emerging market hard currency bonds over valued. With the spread widening in 2018 we believe that CEMBI bonds will deliver good returns for the rest of 2019.
• With the global slow down, the artificial slow down in the US due to the shutdown and the threat for a new shutdown after the 15. February the FED announced to postpone its rate hikes until probably autumn. Depending on economic data there could also be no rate hike in 2019.

 

• The latest US inflation figures are indicating that we might see a disinflationary trend. One fixed income strategist derives from this figure that the FED hiking cycle is over and that at the end the year the FED might cut rates.
• This is very controversially, but what it implies is a weaker US dollar and more uncertainty. This could be a catalyst for gold to go up further due to its safe haven character. Further the cancellation of the launch of the first Bitcoin ETF has pushed money flows towards gold ETFs.
• But this is as well a tailwind for USD emerging market bonds. If as we believe there is only a global slowdown and no recession in the US, Eurozone or China and emerging markets are growing at around 4.5% we can expect that emerging market bond spreads will stay stable or will even slightly tighten. Both is positive for emerging markets bonds.
• We have used recent new bond issues to slightly lengthen our duration. Nevertheless we keep it shorter than commen benchmarks, as the actual yield level in the 2-4 year bucket is very attractive for the attached risk.

 

Bonds covered:
Unifin Financiera 7.25 2023 (Unifin Financiera 2023 7.25)
Fortune Star 6.875 2021 (Fortune Star 2021 6.875)

 

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