(Bloomberg) -- Credit investors started the year worrying about rising rates but by the end of the quarter they had learned the market has changed: credit now matters more.
Until recently, European credit spreads and rates moved roughly in line with each other but in the first quarter they began to decouple. And investors suffered: corporate credit recorded the worst returns for the start of the year since 2009, underperforming sovereigns for the first time since the final quarter of 2016, according to ICE BofAML index data.
“It's the mirror image of what people were expecting at the start of the year,” said Florence Barjou, head of multi-asset investments at Lyxor Asset Management. Investors' focus is now on risk rather than central banks becoming less accommodative due to faster growth and inflation, Barjou said.
“There are more identifiable risks now than at the start of the year,” said Rory Sandilands, an Edinburgh-based portfolio manager at Kames Capital Plc, which manages 20 billion pounds ($28 billion) of fixed income assets. A potential trade war between the U.S. and China, the tech stock selloff, and implosion of short-volatility trades have all fueled broader risk-off sentiment in recent weeks.
Euro corporate bond spreads have jumped since early February and are now at their widest level for six months. Meanwhile, eurozone government bonds have moved in the opposite direction, with 10-year German bonds now yielding about 0.50 percent, dropping back from about 0.77 percent in February.
The widening of spreads has been notable given all the factors supporting credit, including weak supply of new corporate bonds and the European Central Bank's bond-buying program, with its holdings now nearing 150 billion euros. Europe's growing economy and the persistently low default rate are also supportive of credit.
“There is fear that we might be heading for something more sinister,” wrote Suki Mann, founder of Creditmarketdaily.com, in a note Wednesday. “That safe-haven bid is back to some extent (in Europe) and credit isn't managing to hang on to its coattails. It did in 2015-2017, because it was convenient to do so. We're looking at credit in a different way now.”
To contact the reporter on this story: Tasos Vossos in London at tvossos@bloomberg.net.
To contact the editors responsible for this story: Hannah Benjamin at hbenjamin1@bloomberg.net, Tom Freke
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