In February, the spread on the iBoxx Euro Corporate Index tightened by 15 basis points to 145 basis points above the government bond curve. The index earned an absolute return of 0.71%. German 10-year government bond yields closed February at 0.18%, a small increase of 3 basis points compared to the end of January.

The highly positive sentiment among corporate bond investors seen in January continued in February. Investors seem to be discounting more flexible monetary policy (especially from the Fed), additional fiscal stimulus (mainly in China) and market-friendly solutions to geopolitical issues, such as Brexit and future US-Chinese trade relations. There appears to be a consensus that a combination of these trends will cause economic growth to stabilise and bring an end to the series of weak economic data from Europe and Asia.

The positive sentiment described above is also a significant factor behind the continuing inflow of new money into corporate bond funds. This led to growing cash positions among corporate bond investors. As a result, in spite of a substantial increase in the supply of corporate bonds compared to last year, most of February’s new bond issues were placed successfully without the need for meaningful new issue premiums.

US food manufacturer KraftHeinz surprised the market by issuing a significant profit warning. However, the company did announce that it would cut its dividend by about one third and use the proceeds from the planned sale of assets to reduce its debt and in doing so strengthen its balance sheet. After General Electric and AB Inbev, KraftHeinz is the third noteworthy example of a large company that prioritises retention of an investment grade rating over near-term shareholder interests. In contrast, US conglomerate Danaher announced that it would buy General Electric’s biopharma division for about USD21 billion. The majority of this amount will be funded via debt. This resulted in Danaher’s credit ratings being placed on review for downgrade at Moody’s and credit watch negative at S&P.

At EUR49 billion, the supply of new bonds in February was almost the same as in January, but 53% higher than the year-earlier period. Non-financial sector companies issued EUR30 billion in new bonds last month, while financial sector companies issued EUR19 billion in new bonds. New bonds totalling EUR99 billion were issued in the first two months of this year, an increase of about 22% on the same period last year.

During the month, the portfolio’s sensitivity to market trends varied between 100% and 103%. The portfolio therefore held a neutral to slight overweight positioning in terms of market risk.

Our positioning in the industrial goods, utilities and auto sectors performed relatively well in February. In contrast, our positioning in the banking, oil & gas and healthcare sectors contributed negatively to the result. Our liquidity position (in the shape of cash and government bonds) had a negative impact.

At individual company level, positive contributions came from the overweights in Huntsman Corporation, Engie, Volkswagen, AB InBev, AT&T and General Electric. In contrast, the overweights in short-dated bonds issued by Becton Dickinson and Christian Dior, as well as the underweights in Credit Mutuel and Banco Santander, contributed negatively.

In February, the Fund participated in new bond issues by Iberdrola, Blackstone Property Partners Europe, Société Générale, Telia, BBVA, Fortum, Unibail-Rodamco, Coca-Cola and Ford Motor Credit.

Outlook
The material tightening of spreads since the start of this year has led to a decrease in the number of interesting investment opportunities. Combined with our concerns about the slowdown in global economic growth, we will maintain our defensive positioning.