In May, the spread on the ICE BofA High Yield Composite index (Q964) widened by 8 basis points to 182 basis points over de swap curve. The index earned an absolute return of +0.0%. German 10-year government bond yields closed May at -0.19%, representing an increase of 1 basis point compared to the end of April.

Volatility picked up a bit in May driven by more signs that inflation is accelerating in the United States. CSPP eligible curves and shorter-dated bonds (<8 years) remained well supported throughout the month. The non-CSPP long-end saw selling pressure during the last week of April that continued into the first weeks of May. At the end of May the inflation fears started to fade and the long end of the curve started to tighten again.

The increase in European bond yields initially continued in May, with spreads on bunds, OATs and BTPs increasing by 10, 14 and 21 basis points, respectively by mid-May. This is on the back of continued positive momentum in sentiment data, vaccination rates and the US CPI ex food and energy hitting the 3% level for the first time since January 1996! Inflation data from the eurozone also showed an uptick, with consumer prices increasing by 2% in May, the highest level in more than two years, and the Core CPI coming in at 0.9% in May vs. 0.7% in April. Soothing words from the world’s Central Bankers and a slight weakening in US economic data at the end of the month, caused spreads to tighten again to end the month almost unchanged.

The ECB left the Eurozone’s headline interest rate unchanged at 0% in May, in line with expectations. The ECB for now also doesn’t seem likely to decelerate the PEPP buying programme although some council members are hinting at this possibility. We expect these hints to slowly become less subtle on the increasing success of the EU’s vaccination drive. The ECB official PEPP website states the following: “The Governing Council will terminate net asset purchases under the PEPP once it judges that the COVID-19 crisis phase is over, but in any case not before the end of March 2022.”

In the US, yields on 10 year US Treasuries tightened three basis points to 1.60% after initially widening by roughly 5 bps. This was despite continued strong economic data. The US Fed’s expectation that the current strong inflation upturn will prove to be temporary apparently is enough for many market participants not to worry too much about the current readings.

Although economic data remained strong in the US during May, there were a number of readings that disappointed. The unemployment rate surprisingly increased to 6.1% from 6% the month before. Also manufacturing data weakened although it remains in expansionary mode. The ISM manufacturing index declined from 64.7 to 60.7. Also retail sales came in weaker than expected. All in all market participants brushed the unemployment data off as just a blip in the overall strong and improving trend.

The Fed reiterated its continuing support for the US economy, despite upgrading its view of the recovery. Interest rates are kept close to zero and debt purchases will be maintained at $120 billion per month. In relation to inflation, Jay Powell stated that “If we see inflation moving materially above 2% in a persistent way that risks inflation expectations drifting up, then we will use our tools to guide inflation and expectations back down.”

The pandemic’s influence on developed markets waned further during May. At the end of May John Hopkins reported the number of global fatalities in excess of 3.6 million. Also around the end of the month, the amount of vaccine doses administered globally broke the 2 billion level. The US continues to increase the pace of vaccinations. The percentage of the population having received at least one shot increased from approximately 40% of the population to more than 50% of the population during the month of May. Also in April this percentage climbed by 10 percentage points. 40% of the US population is now fully vaccinated. In Europe, confirmed cases are also decreasing, with the vaccination rate gaining positive momentum. As a case in point, over half of the Kempen European Credit Team members will have received their first shot by the middle of June! The European Commission proposed easing restrictions on travel for those who have been fully vaccinated against COVID-19. The situation in many Emerging markets remains precarious although also here the worst seems to be behind us. New infections in India peaked around the 5th of May at above 400k but ended the month around 150k per day. Also India has administered over 200 million first vaccine doses.

At the end of May, Biden’s budget plan for fiscal year 2022 was released. It includes his two signature domestic proposals, the American Families Plan and the American Jobs Plan. The topline budget request for 2022 is $6 trillion. According to the NY Times, this plan that still has to be approved by Congress, would push federal spending to its highest sustained level since World War II. It would also result in deficits running above $1.3 trillion per year throughout the next decade. It is safe to say that the US government will keep stimulating the domestic economy.

In the credit market, the focus returned to primary, as May is traditionally an active month in this regard. The demand for credit remains strong. The ECB continues to increase the pace of purchases, with €80.7 billion bought under the PEPP in May, almost equal to the €80.1 billion in April and 30% higher than the average purchases from January to March. The ECB’s CSPP buying totalled €5.4 billion in May, roughly in line with the average amount bought per month YTD. The ECB now owns over €300 billion in corporate bonds.

Supply of corporate bonds in May amounted to €35 billion, with net supply at €18 billion. Sector wise Real Estate, Industrials & Chemicals and Utilities are dominating the year to date issuance with in total €28 billion, €27 billion and €33 billion, respectively, issued this year. From a net supply perspective it is again the Real Estate sector that has taken the lead with almost €16 billion YTD. Due to the ongoing strong demand for corporate bonds new issue premiums continue to be small to non-existent this year relative to this time last year (pre-crisis) when new issue premiums were strong. Many new issues have been priced on top of or even through their existing curves. Corporate hybrids' supply is up significantly to €22 billion year-to-date versus €6 billion last year. Many corporates continue to issue hybrids to support their ratings and to refinance maturing hybrids, profiting from the low rate and spread environment. Financial supply amounted to €26 billion in May, which is higher than May 2020 (€15 billion). In May we have seen a pickup in LT2 and AT1 issuance by banks despite already healthy solvency levels. Overall supply totals €162 billion YTD, behind 2020 crisis-fuelled YTD supply of €242 billion but ahead of 2019’s YTD supply of €156 billion.

In High Yield, supply was strong in May at €10.2 billion. It is the first time ever that we have seen five consecutive months of supply in excess of €10.0 billion.

During the month, the portfolio’s sensitivity to market trends varied between 101% and 107%. The portfolio therefore held an overweight positioning in terms of market risk.

In May subordinated financials and corporate hybrids underperformed the BB corporates. B rated corporates outperformed BBs but CCC rated corporates significantly outperformed, which is a further testimony to risk seeking behaviour of market participants. The Travel & Leisure, Infrastructure and Chemicals sectors were the strongest performing sectors. The bottom performing sectors were Oil & Gas and Media.

Our positioning in telecommunications, infrastructure and media performed relatively well in May. Our positioning in travel & leisure and industrial goods & services had a negative impact on performance.

At individual company level, positive contributions came from our overweight in Q-Park. Also, our underweights in Telecom Italia and ZF Friedrichshafen contributed to outperformance. Negative contributions came from our underweight in International Game Technologies and our overweight in BP.

In May, the Fund participated in a new deal from Rexel and new hybrids from EDF, ENI and SES Global. As mentioned above, with low new issue premiums we remained disciplined and passed on a number of new deals.

Outlook
We remain fairly constructive on the market. Economic forecasts for the US and Europe have been revised upwards after recent data releases indicate that both regions had shown more resilience than expected. The market is however extremely sensitive to a potential overheating of the US economy, which may lead to a more restrictive monetary policy. Companies’ Q1 2021 results released to date are beating already high expectations. We are however seeing initial signs of shareholder friendly behaviour, with a handful of companies increasing dividends or launching substantial share buyback programmes. With further tightening in spreads, valuations are looking expensive. The technical backdrop continues to remain robust with the ECB recently stepping up the pace of bond purchases and net supply remaining at a low level. All in all we have decided to slightly reduce our beta overweight position given these circumstances.