In October, the spread on the iBoxx Euro Corporate Index widened by 15 basis points to 145 basis points above the government bond curve. The index earned an absolute return of -0.16%. German 10-year government bond yields closed October at 0.38%, a decline of 9 basis points compared to the end of September.

A number of risks have preoccupied investors for some time now, such as the growing trade war between China and the US, the possibility of a hard Brexit, Italy’s high level of sovereign debt and the possibility of the US central bank implementing further interest rate hikes. It appeared to be therefore two different specific developments that contributed to the significant decrease in risk appetite in October compared to last month.

Firstly, third quarter corporate results in the US and Europe were worse than expected. Management teams attributed the worse-than-expected earnings and downward adjustments to guidance on a wide range of factors including higher costs for commodities-, transport- and labour, depreciating currencies in several emerging markets and slowing economic growth in Europe and China. Declining sales of new cars in China and Europe led not just to lower earnings for companies in the auto sector, but also to lower earnings at companies in adjacent sectors, such as chemicals and industrial goods.

In addition to the worse-than-expected corporate results, the second main development that contributed to weakness in the corporate bond market was the ongoing outflows from the asset class. The ECB’s relatively high use of its CSPP programme (EUR3.5 billion was bought in October) was unable to neutralise the negative impact stemming from these outflows.

In contrast to last month, subordinated bonds issued by banks and insurers performed poorly. The relatively poor corporate results over the third quarter meant that the auto sector was also among the worst performing sectors.

The supply of new bonds amounted to EUR18 billion in October, about 65% down on September and 40% down on the same month last year. Non-financial sector companies issued EUR15 billion in new bonds last month, while financial sector companies issued EUR3 billion in new bonds. Bonds worth EUR367 billion were issued in the first ten months of this year, a decrease of about 5% compared to the same period last year.

During the month, the portfolio’s sensitivity to market trends varied between 97% and 100%. The portfolio therefore held a slight underweight positioning in terms of market risk.

Our positioning in the utilities, banking and auto sectors performed relatively well in October. In contrast, our positioning in the media, telecom and industrial goods and services sectors contributed negatively. Our liquidity position (in the shape of cash and government bonds) made a positive contribution.

At individual company level, positive contributions came from the overweights in Becton Dickinson, TVO and Deutsche Bahn, as well as the underweights in Daimler, Banco Santander, AB Inbev and FCE Bank. The overweights in AT&T, EDF, Eutelsat, ADO Properties and Schaeffer, as well as the underweights in Rabobank and Sanofi, contributed negatively.

In October, the Fund participated in new bond issues by e.g. Amphenol, ALD, Nederlandse Gasunie, CPI Group, Commerzbank, Tesco, CaixaBank, Schlumberger, Atos and Prologis.

Outlook
We will maintain our conservative positioning for the time being. This reflects our concerns about the trend for de-allocation from the corporate bond asset class, the further tapering of the ECB’s CSPP programme later this year and the higher idiosyncratic risks at companies.

As a result of the material widening in spreads since the start of this year, we can identify interesting investment opportunities that we will use to selectively add more risk to the portfolio.