Global fixed income monthly focus - February 2017

February showed the same picture as in January, as markets remain positive for now. During February, the bond markets continued to absorb a wide range of deals from emerging market borrowers, several of which had struggled to issue in the second half of 2016. Investors also continued to buy long-duration debt in Euros, and have shown strong appetite for bank contingent capital. Significant political concerns regarding the outcome of EU elections during 2017 continued to hover over the markets, with potential challenges to Eurozone and even EU stability, and the French election seeming particularly sensitive. There are risks to US rates rising sharply from more expansionary fiscal policy and increased infrastructure spending, with adverse implications for higher risk asset classes.

Rapid Eurozone bank acquisition of government debt: in January the annual growth rate of Eurozone bank loans to general government was 10.5%, down from 11.7% in December, but four times the growth rate for credit to the household or corporate sectors in the same time period. Given negative ECB deposit rates, banks appear to be taking increased duration and asset valuation risks by buying longer-dated government assets to improve returns while retaining high perceived credit quality (especially when a bank buys government debt in its home country). However, when interest rates do rise in the Eurozone, this would increase the risk of an adverse loop amplifying the dampening effects of tighter monetary policy: banks would face potential valuation losses which could impact their profitability and capital positions.

This month's returns on the Markit iBoxx $ Treasuries Index were a modest 0.5% given only a slight change in US rates, with July 2003 reporting the worst monthly return of -4.2% and November 2008 the best at 5.5%.

• Markit iBoxx USD Gold Mining Index returned 3.04% in February, bringing its YTD performance to 6.58%
• Leveraged loan energy sector spreads widened for across all rating categories in February, with the exception of B- and CCC+ after Crude oil prices came under pressure partially due to burgeoning US inventories
• Securitised products spreads were slightly tighter to unchanged in February, with relatively low issuance continuing to support spreads. The credit curve continued to flatten and spreads between tier one and tier two issuers compressed during the month

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