German 10-year government bond yields closed March at 0.50%, a drop of 16 basis points compared to the end of February. In March, the spread on the index for investment grade corporate bonds widened by 18 basis points to 107 basis points above the government bond curve. The index earned an absolute return of -0.12%. The spread on the High Yield (BB) index widened by 24 basis points, which generated an absolute return of -0.33%.

In March, markets were dominated by fears of a trade war. On 1 March, President Trump announced that tariffs were to be levied on imports of steel and aluminium, and on 22 March that import tariffs amounting to USD 50 billion were to be introduced on goods from China. This pushed down bond yields in the US and Europe. Worse than expected economic data from the Eurozone did not help the situation. Retail figures in Germany were lower than expected and several leading indicators were down. Current levels remain in line with growth in excess of 2% in the Eurozone, but indicators are pointing to a slight slowdown in growth. Equity markets dropped sharply in March, partly due to two major tech companies coming under public pressure. This had an obvious negative impact on investor sentiment.

In addition to general risk aversion among investors, further outflow from the corporate bonds and High Yield bonds asset classes is an important factor behind the widening of spreads in March. Continued bond-buying by the ECB – mainly in the primary market – failed to cancel out the negative sentiment on the credit market.

The supply of new corporate bonds was EUR48 billion in March, about 50% up on February and more or less the same as a year earlier. Non-financial sector institutions issued EUR6.7 billion in new European High Yield bonds in March, about 28% down on last year. A total of EUR20.5 billion in new European High Yield bonds was issued by non-financial institutions in the first three months of the year, a decrease of 8% compared to the same period last year.

February was a negative month for the Kempen Income Fund: the portfolio earned a return of -0.44%. The largest negative contribution to the performance came from the wider spreads on corporate bonds and High Yield bonds. We hedge part of the exposure of corporate bonds and High Yield bonds by purchasing protection in the CDS market. In March, however, this position cost the fund performance as the spreads on the CDS indices tightened, in contrast to the cash spreads.
The spreads on Slovenia, Spain and Italy tightened sharply in March and this contributed positively to the performance. As bond yields decreased in March, our restricted duration position yielded 10 basis points.

At individual company level, positive contributions came from the overweights in Darling Ingredients, INEOS, Huntsman, TVO, ZF Friedrichshafen and Christian Dior, as well as from the underweights in AXA, Daimler, Salini Impreglio and a number of Liberty Global entities, including Telenet and UPC. In contrast, the overweights in Schaeffler (holdco), Telecom Italia, Elis, EDF, Allianz and Crédit Agricole made a negative contribution to the return.