In September, the spread of the iBoxx Euro Corporate Index tightened by 4 basis points to 107 basis points above the government bonds curve. The index earned an absolute return of -0.22%. German 10-year government bond yields finished September at 0.46%, 10 basis points higher than at the end of August.

In September, the ECB failed to provide clarity on how it intends to scale back its bond-buying programmes next year. However, it is becoming clear that the Corporate Sector Purchase Programme, or CSPP, has not been reduced proportionally in line with the initial tapering of the QE programme. Earlier this year, this programme was reduced from EUR80 billion to EUR60 billion per month. The ECB purchased approximately EUR8 billion in credits in September. This means that the ECB now holds about 10% of all eligible corporate bonds.

In addition to the ECB’s steady purchase of credits, strong inflows into the investment grade credits asset class was another important cause of spreads tightening in September. This positive technical climate ultimately outweighed the numerous concerns currently preoccupying investors. These included the geopolitical crisis in Korea, potential further interest rate hikes by the Fed and plans to reduce the size of its balance sheet, growing constitutional tensions between the Spanish and Catalonian governments and the economic losses caused by a series of hurricanes in the US and Caribbean islands.

One sector in which spreads did respond to the losses caused by the hurricanes was the reinsurance sector. Having already been confronted with the prospect of higher claims in the wake of Hurricane Harvey at the end of August, the sector was hit by two further hurricanes (Irma and Maria) and a severe earthquake in Mexico. So far, it seems likely that these events will chiefly have an impact on the third-quarter earnings of reinsurers and to a much lesser extent on their solvency levels. Nevertheless, concerns about the sector’s capital position could arise if additional disasters occur in the near future and if the reinsurance sector has not yet been able to raise premiums significantly.

Two relatively large acquisitions were announced in September. United Technologies, a US industrial conglomerate, wants to take over fellow aerospace industry company Rockwell Collins for about USD30 billion. Given that United Technologies wishes to finance the acquisition primarily with debt, S&P, Moody’s and Fitch have announced that they will review their current ratings, noting that it is highly likely that the ratings will be downgraded. The agencies responded in a similar fashion when Fortum, a Finnish utility, surprised the market by announcing its bid to acquire Germany’s Uniper for EUR9.8 billion. Both acquisitions are in line with the recent trend of mainly non-financial companies being prepared to allow their creditworthiness to deteriorate in order to achieve in-organic growth.

In September, the supply of new bonds was EUR51.7 billion, more than twice the amount of the previous month and about 8% up on September 2016. Non-financial sector institutions issued EUR24.2 billion in new bonds last month, while financial sector institutions issued EUR27.5 billion in new bonds. During the first nine months of this year, the supply of new bonds amounted to EUR418.2 billion, a slight decrease of 4% compared to last year.

Across the month, the portfolio’s sensitivity to market trends varied between 103% and 107%. The portfolio, therefore, held a relatively slight overweight positioning in terms of market risk.

Our positioning in the telecom, oil & gas and banking sectors performed relatively well in September. In contrast, our positioning in the food and pharmaceutical sectors, as well as in non-banking financial service providers, contributed negatively. Our liquidity position (in the shape of cash and government bonds) contributed negatively.

At individual company level, the overweights in Telecom Italia, AT&T, Engie, ENI, Total and Volkswagen contributed positively. In contrast, the underweights in Daimler and Bayer and overweight in Hannover Re made a negative contribution.

In September, the Fund participated in new bond issues by, among others, Transurban, Belfius, Engie, Brenntag, Goodman Australia, Volksbank, Commonwealth Bank of Australia (subordinated), Deere, Total and CPI Property Group.

Outlook
In spite of the fact that we hold a more positive view of the technical climate than we did a month ago, we continue to be reasonably cautious about the European credit market. The lack of dispersion in the spread premiums that companies with wide-ranging levels of creditworthiness are having to pay remains a serious cause for concern. Moreover, from a historical perspective spreads are still very tight. We also see risks in the current conflict between the US and North Korea and in inflation rising more rapidly than expected due to the upturn in the global economy. For this reason, in spite of the robust economic climate in Europe and the persisting support for the credit market deriving from the ECB’s CSPP, we intend to maintain our conservative positioning in the short term.