March was a positive month for fixed income markets. Spreads on corporate bonds tightened, while yields dropped sharply worldwide. German government bond yields even dipped below 0% for the first time since October 2016. The spread on the high yield index tightened by 7 basis points to 218 basis points above the swap curve; the spread on the iBoxx Euro Corporate Index tightened by 5 basis points to 140 basis points above the government bond curve. German 10-year government bond yields closed March at -0.07%, 25 basis points lower than at the end of February. The main reasons for these movements were signals from the Fed and the ECB that they are planning to ease monetary policy, but poorer economic data in the Eurozone did not help either.

At the start of March, the ECB announced that it would keep interest rates low for longer, at least until the end of 2019, and that it would launch a new TLTRO programme that allows banks to borrow from the central bank at very attractive rates. The new TLTROs will have a maturity of two years and be indexed against the ECB’s interest rate. This announcement came earlier than the market had expected and is a response to the ECB’s lower inflation and growth forecasts. The growth forecast for 2019 was even reduced from 1.7% to 1.1%. Economic indicators in the Eurozone have been worse than expected for several months now. The German PMI, which measures confidence in the German manufacturing sector, stood out in particular last month. It came at its lowest level for the past seven years.

The Fed surprised the market in March by making a significant adjustment to its dot plot at its meeting. This demonstrates that it no longer intends to raise interest rates again in 2019 and that it will cease balance sheet reduction as of September. The growth and inflation forecasts were also adjusted downwards slightly. Yield curves flattened in response to this, and the 3-month versus the 10-year curve even became negative. A negative yield curve is often a precursor of a recession.

The Kempen Income Fund noted a performance of 0.26% in March. The fund again profited greatly from the sharp tightening of spreads on corporate bonds. With the exception of Spain, there was a small tightening of spreads versus Germany for all the Eurozone countries. Spanish spreads widened by a few basis points at the end of the month after the country’s rating remained unchanged, while the market had hoped for an upgrade to the rating. The fund profited from its positions in Slovenia, Portugal, Ireland and Belgium. The underweight in France made a small negative contribution.

At individual company level, there were positive contributions from the overweights in Telecom Italia, DS Smith, Peugeot, Schaeffler, Leonardo, Medtronic, Atos, Sky, Partner Re and London Stock Exchange, as well as from the underweights in Saipem and Netflix. In contrast, the overweights in Huntsman Corporation, Smurfit Kappa and Adler, as well as the underweights in Wind, Salini Impreglio, Worldpay, Daimler and Banco Santander, contributed negatively to the return.