In September, the iBoxx Euro Corporates Index tightened by 2 basis points to a level of 54 basis points over the swap curve. This is equivalent to 84 basis points over the government bond curve. The index earned a total return of -0.68%. German 10-year government bond yields closed September at -0.20%, representing an increase of 18 basis points compared to the end of August.

Inflation was the number one point of debate during September, closely followed by the possible bankruptcy of one of China’s biggest real estate developers named Evergrande. In the end the Evergrande situation had relatively little impact on market sentiment as the consensus expectation took hold that the Chinese government will be able to manage down the $300 billion balance sheet in a relatively orderly fashion. Asian High Yield markets were however clearly impacted. Furthermore a strong rise in energy and gas prices also affected market sentiment. Price increases of more than 50% were seen in Europe but also in China. This contributed to the aforementioned inflation debate.

Economic data remained strong in Europe and to a lesser extent in the US, with Euro Area Composite PMI remaining near the 15 year high at 59 and the US PMI settling at the 55.4 level. In China, the services PMI rebounded to 53.2 from the weak August reading of 47.5. However, the manufacturing PMI declined further to 49.6, indicating a very mild contraction of activity in the manufacturing sector. There are more and more signs that the global economy is impacted by supply shortages in several sectors which is holding back economic activity. It might also cause inflation to remain elevated for a longer period than initially expected.

September inflation data at least didn’t indicate a near term levelling off in upward price pressure. US CPI of 5.3% and core CPI at 4.0%, both stayed close to recent highs (5.4% and 4.5% respectively). Europe’s estimated CPI for September saw the year-on-year increase at 3.4%, compared to an August reading of 3.0%.

As a result, European bond yields continued to widen in September, with spreads on bunds, OATs and BTPs widening by 18, 18 and 15 basis points, respectively. Central bank commentary from the FED and ECB indicated a little bit less certainty with regard to the temporary nature of the recent high inflation data. We also saw several smaller central banks raise rates around the world to contain inflationary expectations. The Bank of England also surprised by stating that they could raise rates while simultaneously reducing their quantitative easing programme.

Similar to Europe, yields on 10 year US Treasuries increased by 18 basis points to 1.49%. The Fed minutes indicate a desire to raise rates in the second half of 2022.

Further US fiscal stimulus has stalled for now after the Senate voted in favor of the so called infrastructure bill; this has however not been approved yet by the House of Representatives. The debt ceiling again came into play in the political debate and a government shutdown was averted at the last minute by agreeing on a temporary funding plan. It doesn’t appear that Biden’s grand spending plan will be approved anytime soon.

The COVID-19 pandemic held little sway over markets during September. More and more countries are opening up again for foreign travel. Australia basically abandoned the zero COVID strategy realizing that this is not a long term strategy.

In credit, primary markets were very active in September. Supply was heavy in the beginning of the month but slowed down towards the end. At €73.6 billion gross, this was the strongest month YTD and also higher than the €60.1 billion of gross supply in September 2020. A driving factor was cross-border issuance due to the cheapness of € corporate bond markets. Notable was the tendency towards longer-dated maturities. The split between financials and corporates was €35.7 billion / €37.9 billion. Issuance across CoCo/LT2/Corp hybrids in September was €4.6/4.9/5.4 billion compared to €1.8/4.3/5.7 billion in September last year. Net supply amounted to €17.1 billion (August was €9.7 billion). Most issuance priced close to our assessment of FV, new issue premiums remain limited.

The demand for credit remained strong in September despite the abovementioned turmoil. Although the ECB scaled back its PEPP program as communicated earlier, investors poured more money into Euro credit funds which compensated most of this. Inflows for August were €2.3 billion (0.9% of AUM), September inflows were strong at 1.1% of AUM. CSPP purchases in September were €5.5 billion, in line with the monthly average YTD. The inflows and technical support in the market have led to the supply being well absorbed. The PEPP purchases were lower with €75 billion purchased in September compared to slightly more than €80 billion on average in the May – July period.

In September, Infrastructure and Food & Beverage were the underperforming sectors. This can be mainly attributed to the longer duration of these sectors. Travel & Leisure was by far the best performing sector as several airlines did equity raisings and more barriers for international travel were removed.

The portfolio delivered a return of -0.72% (gross). This was 4 basis points below the benchmark return of -0.68%. During the month, the portfolio’s sensitivity to market trends varied between 100% and 103%. The portfolio therefore held a small overweight positioning in terms of market risk. Our positioning in Banks, Telecommunications and Technology performed relatively well in September. Our positioning in Oil & Gas and Chemicals had a small negative impact on performance. At individual company level, positive contributions came from our overweight in Veolia Environment while our underweights in Orange and Unibail also contributed positively. Negative contributions came from amongst others our overweights in Apa Group and Coca-Cola Company.

In September, the Fund participated in new deals from amongst others Sofina, Adecco, and Woolworths amongst others. On the financials side, we participated in ING Group, NN Bank, Credit Agricole and Swiss Life amongst others. We continue to take a conservative approach towards participating in new issues as new issue premiums are limited and all in valuations are stretched.

Outlook
We remain fairly constructive on the market. US and European economic data remains strong but growth rates are slowing. Companies’ Q2 2021 results are supportive, with many companies revising guidance upwards. However we are currently seeing increasing signs of shareholder friendly behaviour, with more companies increasing dividends, launching substantial share buyback programmes or showing appetite for M&A. With spreads at all-time lows, valuations are looking really expensive. The technical backdrop continues to remain supportive for now with the ECB continuing to actively buy corporate bonds and being very clear that actual tapering is some time off and will be done in a very gradual manner.