German 10-year government bond yields closed September at 0.47%, an increase of 17 basis points compared to the end of August. In September, the spread on the index for investment grade corporate bonds tightened by 5 basis points to 130 basis points above the government bond curve. The index earned an absolute return of -0.29%. The spread on the High Yield (BB) index tightened by 1 basis point, yielding an absolute return of 0.35%.

September was a positive month for the financial markets, in spite of persisting concerns about the economic impact of a potential hard Brexit, the burgeoning trade wars between the US and its main trade partners and uncertainty about the budgetary discipline of Italy’s new government.

At the end of September, the Italian government announced its budget for 2019. The market was hoping for a deficit of less than 2%, but the government said it expected the budget deficit to be 2.4% over the next three years. This is also substantially higher than the 1.6% agreed with the EU for 2019. On 15 October, the budget needs to be submitted to the European Commission, after which it will issue an opinion at the end of November. This will not be positive, given the remarks on publication of the budget plans. There is also a high risk of Italy’s credit rating being downgraded in the short term in response to the budget plans. Both Moody’s and S&P have scheduled rating reviews for the end of October.

Subordinated bonds issued by those companies that should profit most from higher interest rates, banks and insurance companies, performed very well. In spite of the umpteenth profit warning of the past few months from a major player in the auto sector (BMW this time), bonds issued by auto sector companies also performed above average in September. This also applied to bonds issued by companies operating in other cyclical sectors, including construction materials, materials and oil & gas. September also saw a small recovery in spreads on bonds issued by companies with an above-average dependence on emerging markets.

The dispersion within the general high yield market increased sharply in September. The prices of bonds issued by several companies with a B rating or lower dropped considerably. Corporate bonds with a BB rating, i.e. higher-quality bonds, displayed significantly better results than those issued by companies with lower ratings. Furthermore, the trend of outflow from the high yield market seems to have come to an end. Higher effective yields and spreads are apparently again tempting investors back into the asset class.

September was a positive month for the Kempen Income Fund. The portfolio earned a return of 0.29%. The differences in yield versus Germany tightened for Eurozone countries in September. The spread on Italian government bonds tightened particularly sharply, in spite of the turmoil in Italy at the end of the month. Other peripheral EU country spreads also tightened but by a smaller amount. This led to a positive contribution of 19 basis points. The fund’s exposure to Investment Grade corporate bonds and High Yield bonds accounted for a positive contribution of 13 bps. In addition, the currencies in Norway and Sweden performed well, causing our positions in these countries to add 5 basis points to the performance.

At individual company level, positive contributions came from the overweights in Telefonica, FiatChrysler, Schaeffler, Smurfit Kappa, CaixaBank, Bayer, EDF and Volkswagen, as well as the underweights in Salini Impreglio and Jaguar Land Rover. In contrast, the overweights in Casino, Orano, Adler, RWE Dea, Tank & Rast, Iliad, Deutsche Bahn and Danske Bank, as well as the underweight in Generali, contributed negatively.