• Developed market bond yields rose as markets digested more robust inflation and growth data, along with mixed messaging from central banks. 
  • Government bond yields pushed higher, with two- and 10-year US Treasury yields rising by 41 and 34 basis points, respectively. 
  • Investment-grade credit spreads broadly tightened over the month, as demand continued to outstrip supply. 

Fixed income markets grappled with persistent inflation and strong labour market data in February, with mixed messaging from central banks pushing up developed market bond yields. In the US, increases in non-farm payrolls were almost double market expectations, pushing up Treasury yields. 

In terms of growth, we are seeing growing dislocation between major developed economies. While growth in the US remained strong, the UK economy entered a technical recession in the second half of 2023, with GDP falling by 0.1% and 0.4% in Q3 and Q4, respectively. In the euro area, German manufacturing slumped amid weak economic growth. 

In the US, headline inflation slowed to 3.1%, while core CPI, which excludes volatile food and energy prices, remained steady at 3.9%. In the UK, both headline and core inflation were lower than expected, staying steady at 4% and 5.1%, respectively. In the euro area, inflation also came in below expectations, with headline and core inflation slowing to 2.8% and 3.3%, respectively. 

The US Federal Reserve, Bank of England and European Central Bank all left their key interest rates unchanged at 5.5%, 5.25% and 4%, respectively. 

Monthly performance by market

Global government bonds Corporate bonds Emerging market bonds
  UK Europe US HY  
Bloomberg Global Aggregate Treasuries (USD Hedged) Bloomberg Sterling Corporate Bond Index (USD Hedged) Bloomberg Euro-Aggregate Corporates Index (USD Hedged) Bloomberg Global Aggregate USD Corporate  Bloomberg Global High Yield Index (USD Hedged) JP Morgan Emerging Markets Bond Index (EMBI) Global Diversified (USD Hedged)
-0.49% -0.57% -0.75% -1.35% 0.90% 0.98%

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Source: Bloomberg. For the period 31 January 2024 to 29 February 2024. Bloomberg indices are used as proxies for each exposure. Calculations are in USD.

Government bonds

Developed market government bond yields pushed higher in February. In the US, two-year yields rose by 41 basis points (bps), while 10-year yields rose by 34 bps. In the euro area, German two-year yields rose by 47 bps, while 10-year yields rose by 25 bps. In the UK, two- and 10-year yields rose by 4 bps and 33 bps, respectively.

Credit markets

In credit markets, investment-grade (IG) spreads broadly tightened over the month. US IG spreads remained flat, while UK and euro area IG spreads tightened by 7 bps and 10 bps, respectively1. Emerging market (EM) IG and EM high yield (HY) tightened by 13 bps and 69 bps, respectively2. EM HY saw the largest spread tightening in the month among fixed income sub-asset classes. Global HY spreads tightened by 38 bps3.

Monthly change in spreads

 

Source: Bloomberg indices: Global Aggregate Credit Average OAS Index, Global Aggregate Supranational Index, US Aggregate Corporate Average OAS Index, Euro Aggregate Corporate Average OAS Index, Sterling Aggregate Corporate Average OAS Index, US Aggregate ABS Average OAS Index, US Aggregate CMBS Average OAS Index, Global High Yield Average OAS Index, J.P. Morgan EMBI Global Diversified IG Sovereign Spread Index, J.P. Morgan EMBI Global Diversified HY Sovereign Spread Index. Data for the period 31 January 2024 to 29 February 2024.

As Q4 corporate earnings season in Europe drew to an end, earnings were in line with our expectations and broadly showed a continuation of the previous quarter’s trends. Despite financial sector firms posting strong earnings, we see confirmation that 2023 was likely the peak for corporate fundamentals, and interest rate tailwinds are fading in 2024. Transportation sector earnings were slightly ahead of expectations, while communications and consumer cyclicals were broadly in line with expectations. 

We maintain our view that IG company fundamentals are in good shape. Except for select sectors (real estate, for example) many corporates have deleveraged over the past few years and are better positioned in terms of leverage and interest coverage compared with pre-pandemic levels. These strong metrics will help firms remain resilient in the event that economic conditions are subdued for longer than expected.

The technical backdrop for credit remains positive. With the upcoming rate-cutting cycle, even if somewhat delayed, we expect demand for credit to remain strong. 

Emerging markets

EM credit returned 1.0% in February. Strong excess returns of 2.8% were dented by US Treasury losses of -1.8%, as 10-year US Treasury yields rose 34 bps during the month. 

While EM HY was the standout performer in February (2.6%), EM IG spreads compressed strongly, tightening 12 bps and outperforming US corporates4. New issue supply slowed and attractive valuations invited flows into EM IG from dedicated and cross-over investors seeking to lock in high all-in yields. EM HY spreads tightened 69 bps5, driven by meaningful improvements in country fundamentals like Egypt, whose bonds rallied 21% after the government announced a large bilateral funding agreement with the IMF.

EM HY continues to outperform EM IG

Source: Bloomberg and JP Morgan, with Vanguard calculations. Chart shows cumulative returns for the period from 31 January 2023 to 29 February 2024. Proxies used: EM IG: Investment Grade sub-index of the J.P. Morgan EMBI Global Diversified index; EM HY: High Yield sub-index of the J.P. Morgan EMBI Global Diversified Index. Calculations in USD.

In the near term, we expect EM credit to remain well supported. Valuations in EM IG remain attractive relative to US IG corporates, supporting demand for high-grade issuers, while EM HY could continue to benefit from the buoyant global risk appetite underpinned by resilient growth data and proactive central banks.

Outlook

In credit, the market is continuing to trade on a soft-landing narrative. We are starting to see European IG credit outperform US IG, and we continue to think European IG offers better value. In HY corporates, we are seeing an uptick in default activity as fundamentals weaken, though many companies are starting from strong positions and margins are benefitting from falling input costs. Technicals in this sector are improving, driven in part by a lack of supply. A recessionary outcome would see lower-quality sectors become more vulnerable, though yields at current levels are likely to offset some of the spread widening. We view CCC-rated bonds to be more attractive from a valuation perspective, though these names tend to be riskier given where we are in the economic cycle. In EM credit, recent strong performance has brought attention back to the asset class, with flows turning more balanced than in 2022 and 2023. The demand for EM credit has allowed issuers to front-load a record share of their full-year issuance, setting up a favourable supply-demand dynamic for EM credit in the near term. Spreads are looking tight coming into March, but there may be further to go in the EM rally. 

 

1 Source: Bloomberg Global Aggregate Credit Index, 31 January 2024 to 29 February 2024.

2 Source: JP Morgan EMBI Global Diversified Index, 31 January 2024 to 29 February 2024.

3 Global High Yield Average OAS Index, 31 January 2024 to 29 February 2024. 

4 Source: Vanguard and JP Morgan. Average spread calculations based on the J.P. Morgan Emerging Market Bond Index (EMBI) Global Diversified Index relative to US Treasuries. Monthly change in spread is for the period 31 January 2024 to 29 February 2024.

5 Source: Vanguard and JP Morgan. Average spread calculations based on the J.P. Morgan Emerging Market Bond Index (EMBI) Global Diversified Index relative to US Treasuries. Monthly change in spread is for the period 31 January 2024 to 29 February 2024.

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The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Past performance is not a reliable indicator of future results.

Some funds invest in emerging markets which can be more volatile than more established markets. As a result the value of your investment may rise or fall.

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