YCAP’s Frings on Putin, Yellen and the ECB

Thomas Frings, director at YCAP Asset Management, an independent specialist fixed income manager from Luxembourg, outlines key factors affecting the current investment climate.

Vladimir Putin, well known for martial appearances as a tough rider stripped to the waist or as huntsman with his riffle in position, has put on his boxing gloves against Ukraine and the EU with the annexation of the Crimean Peninsula.

The impact on financial market and bond prices, ex Russia obviously, has been of limited nature and credit spreads remain remarkably stable year-to-date. Ongoing conflict may well increase market sentiment in the near future and may cause some volatility.

An escalation, which will almost certainly harm Euro area growth prospects, appears less likely to YCAP based on the strong economic interdependence between Russia and Europe.

After a positive start of the year with total returns in investment grade well over 2.8% year-to-date, investors continued to keep an eye on central banks and monetary policies.

Janet Yellen, chairing the Federal Reserve, indicated – much to the surprise of many observers – that rates might be expected to rise six months after the end of tapering. Markets have responded in an irritated manner on the hawkish stance on the open definition of considerable time between the end of the taper and rate increases.

The Eurozone, in contrast, is more questioned on „dovish” or „more dovish”. As expected no direct response by the ECB to continuously low inflation after the recent ECB meeting was given.

In spite of a strong verbal approach to calm fears, the ECB will remain in the wait-and-see mode and will consider forms and options for a possible quantitative easing.

Financial markets continue to be very sensitive to monetary policies, in spite of geopolitical topics dominating the headlines.

YCAP takes a neutral position on investment grade corporate bonds, which have performed very well in comparison to other asset classes with 2.8% year-to-date.

Within high yield corporate bonds, YCAP expects more spread compression to come, adheres its bias towards BBs and crossover based on deep fundamental analysis and takes a positive view, as it also does for asset backed securities. Views on sovereigns and financials are neutral.

Amidst the given ultra-low yield environment YCAP believes the search for yield will continue and expects spreads to continue to tighten very moderately. Investors in need to generate sufficient returns will have to rely on ongoing carry and names with greater tightening potential.

Barring any further escalation in Eastern Europe fundamentals remain very strong and corporates have ample access to funding in capital markets.

The latest Moody‘s default reports also resumes that technicals and fundamentals in credit remain firm enough that credit should remain a low beta asset class to any volatility in the foreseeable future.

Rates are still low and have pushed credit to the richest levels on record. The tapering is not putting much pressure on US treasury yields and even less on bund yields.

In a world of low growth, high unemployment, ongoing risks of low inflation coupled with a still fragile economic environment it is difficult to see how bund yields will rise decisively in the foreseeable future.

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