In August, the spread on the iBoxx Euro Corporate Index tightened by 13 basis points to 124 basis points above the government bond curve. The index earned an absolute return of +0.16%. German 10-year government bond yields closed August at -0.40%, representing an increase of 12 basis points compared to the end of July.

Despite the number of Covid-19 infections surpassing the 25mln mark globally, markets took comfort from the fact that the level of hospitalisations in most developed markets remained relatively limited when compared to the peak levels seen earlier this year. This is partly due to the prevalence of relatively young people amongst the newly infected, but also due to improved treatment methods and medications. Importantly, trends in new infections and hospitalisations in the large US states of Texas, California and Florida improved markedly compared to the previous month. Whilst there is a risk that, as the autumn season approaches, more people will be spending time indoors, thereby raising the possibility of a so-called “second wave” of infections, global progress on the medical front continues apace. Markets now expect one or two vaccines to receive regulatory approval by the end of the year, thereby raising investor hopes that, by the second half of 2021, more and more economic sectors, particularly those related to travel & leisure, can revert to normalised levels of activity.

As part of the annual Jackson Hole symposium, Federal Reserve chairman Jerome Powell announced the outcome of the Fed’s monetary policy framework review. Going forward, the Fed will target an average inflation rate of 2%, with a new willingness to maintain low interest rates even if inflation temporarily overshoots the 2% target. The policy change, which reinforced earlier statements that the Fed would maintain low interest rates for the foreseeable future, contributed to a strong demand for riskier assets in both credit and equities. One issue that is slowly beginning to gain attention from investors is the risk of a constitutional crisis in the US if the outcome of the Presidential election in November is subsequently contested on the basis of alleged fraud. Ongoing large-scale protests related to social injustices, accompanied by sporadic violence, point to an increasingly polarised society and electorate.

On the corporate front, a number of large M&A transactions were announced during August, including Siemens Healthineers’ acquisition of US-based Varian Medical Systems for USD 16.4bln and French water and waste management company Veolia Environnement’s proposed acquisition of domestic rival Suez for approximately EUR 10bln. Elsewhere, German utility group RWE issued EUR 2bln of fresh equity to strengthen its balance sheet in the wake of the group’s recent acquisition of solar and wind projects from Nordex.

During the month, subordinated bonds issued by banks and insurers, as well as bonds issued by companies operating in the basic resources, travel & leisure and real estate sectors outperformed. By contrast, bonds issued by companies operating in the healthcare, retail and technology sectors underperformed. Nonetheless, and similar to the previous month, all sectors experienced spread tightening.

The supply of new bonds was EUR 8 billion in August, representing a 71% decrease compared to July and a 72% decrease compared to the year-earlier period. Non-financial sector companies issued EUR 2 billion in new bonds last month, while financial sector companies issued EUR 6 billion in new bonds. During the first eight months of this year, a total of EUR 432 billion of bonds was issued. This represents a 21% increase compared to the year-earlier period.

During the month the portfolio’s sensitivity to market trends varied between 101% and 103%. The portfolio therefore held a neutral to slight overweight positioning in terms of market risk.

Our positioning in the food & beverage, industrial goods & services and technology sectors performed relatively well in August. In contrast, our positioning in the banks, travel & leisure and utilities sectors contributed negatively. Our liquidity position (in the form of cash and government bonds) had a negative impact.

At individual company level, positive contributions came from the overweights in Euronet Worldwide, SSE, DSV Panalpina, Huntsman Corporation and Great-West Lifeco. By contrast, our overweights in short-dated bonds issued by Bank of America, Eurogrid and Enexis, as well as our underweights in General Electric (excluded), British Petroleum (excluded) and Unibail-Rodamco contributed negatively.

In August, the Fund participated in a new corporate hybrid bond issue from Total.

During the month, the fund increased its exposure to CNH Industrial, one of the world’s largest producers of agricultural equipment with renowned brands such as New Holland and Case, that is also an industry leader in sustainability. CNH Industrial is, for example, committed to reducing CO2 emissions per unit of production by 60% and obtaining 90% of its total electricity consumption from renewable sources by 2030. Furthermore, the group is actively promoting a shift away from diesel-powered commercial vehicles towards LNG-powered vehicles in an effort to tackle NOx emissions and other sources of air pollution.

Outlook
Despite slightly less attractive valuations, we remain relatively constructive on the market for a number of reasons. First, data continues to suggest that economic growth has bottomed. Second, management teams are prioritizing bondholder interests over near-term shareholder interests, as highlighted by the ongoing trend of rights issues. Finally, the technical backdrop remains very robust as a result of the ECB’s willingness and ability to pump liquidity into the government and corporate bond markets.