German 10-year government bond yields closed July at 0.44%, an increase of 14 basis points compared to the end of June. In July, the spread on the index for investment grade corporate bonds tightened by 11 basis points to 125 basis points above the government bond curve. The index earned an absolute return of 0.28%. The spread on the High Yield (BB) index tightened by 33 basis points, resulting in an absolute return of 1.57%.

Bond markets experienced a significant movement on 20 July, prompted by speculation in the market that the Bank of Japan was considering a change to its monetary policy. This triggered the largest increase in Japanese bond yields of the past two years. It also pushed up yields in the rest of the world. The Bank of Japan was subsequently forced to spend a large amount buying bonds in order to prevent further increases. Ultimately, the Japanese central bank made few alterations to its monetary policy at the end of July. However, it did announce that it would be more flexible in its bond buying and that it would permit Japanese 10-year bond yields to move within a broader range.

The tightening of investment grade credit and high yield spreads in July was mainly driven by two factors. Firstly, corporate results over the second quarter were better than expected for US companies in particular. In addition to the recently implemented tax cuts, US companies continue to profit from the solid economic growth in the most important regions of the world. However, pointing to the uncertain impact on investments and trade of protectionist measures and a potentially fast-approaching hard Brexit, businesses are rather reluctant to extrapolate their recent performances over the remainder of 2018.

The second factor that helped to tighten spreads was the restricted number of corporate bonds issued in July, especially when taken into account the number of redemptions during the month. When combined with lower de-allocation from the investment grade credits asset class, and even inflow into high yield, this led to larger cash positions at institutional investors. Given this increase in cash and the underlying high yields, it was mainly insurers that bought long-term corporate bonds in July.

July was a positive month for the Kempen Income Fund. The portfolio earned a return of 0.59%. The differences in yields versus Germany shrank for all the Eurozone countries in July. In particular spreads on Spain, Slovenia and Portugal tightened, although spreads are currently nowhere near the lowest levels seen this year. Spreads on government-related paper also tightened, while spreads on Chile and Korea tightened by over 20 basis points. This all combined to generate a positive contribution of 22 basis points. The fund’s exposure to investment grade corporate bonds and high yield made a positive contribution of 30 bps.

At individual company level, positive contributions came from the overweights in K+S, Wind, Leonardo, Telefonica, NN Group, Volkswagen, EDF, OMV and Bayer, as well as the underweights in TDC, Nokia and Loxam. In contrast, the overweights in RWE Dea, Tank & Rast, TVO, CK Hutchison, Becton Dickinson and Christian Dior, as well as the underweights in Daimler, Generali and CNP Assurances, contributed negatively.