Global fixed income focus - June 2016

Despite the Brexit earthquake and the consequent volatility in most asset classes, investment grade corporate bonds in both Europe and the US managed to post positive returns over June. The very disappointing US May employment report of +38K jobs added (later revised even lower to only +11K) and the phenomenal June report of +287K jobs, have only led to more confusion on the timing of the next Fed rate increase. In addition, the market continues to brace itself for the influx of economic data to properly gauge the initial financial impact of the vote on the UK economy.

• North American and European energy spreads tightened across every rating category in June, with CCC+ rated loans tightening the most. The average spread basis between North American and European loans reached -25bps the day of the Brexit vote announcement, almost completely retracing back to its tightest level of -29bps reported on April 20th
• June was always going to be dominated by Brexit and, in common with most markets, credit got it wrong. The Markit iTraxx Europe started the month at 72.5bps and by mid-month had widened to 88bps as opinion polls showed the "Out" camp with a slender lead
• The Markit iBoxx $ Liquid Investment Grade Index recovered after a flat May to return 2.25%, and has now returned over 7% year-to-date. Euro returns were less impressive, both over June and YTD. The Markit iBoxx " Liquid Investment Grade Index was up 0.99% over the month and by just over 4% YTD. Perhaps surprisingly, sterling bonds outperformed both US dollar and euro, with the Markit iBoxx " Liquid Investment Grade Index returning 2.52% and 7.50% over the month and year respectively
• Brexit contagion spread rapidly through Europe, with the United Kingdom, Germany, France, and Italy all hitting new multiyear wide CDS spreads. Figure 1 shows the gradual decline in benchmark 10yr government bond yields throughout the month of June and highlights the days where every benchmark bond's yield widened or tightened in sync
• June was one of the most active months of municipal bond issuance since 2009, as $45.2 billion of new supply was priced and easily absorbed by the market. The rally in rates drove municipal prices much higher in June, with only a subtle widening of spreads that coincided with the sharp rallies in treasuries
• US securitised products held up very well during the volatility driven by Brexit, while European sectors came under significant pressure and liquidity did suffer to varying degrees

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