Total return in February and Year To Date

reflation

Source: Inter Continental Exchange (ICE) and AXA IM Research

Credit markets produced their worst monthly performance in more than a year during February after being hit by wider spreads and higher interest rates.

Digging into the detail of the decline it is however clear that investment grade bonds endured a worse time, that their high yield counterparts.

This relative outperformance is consistent with the reflation trade dynamics that have been evident for some time within the market, as investors begin to position themselves for higher growth and the return of inflation.

We expect this reflation trade dynamic to persist but the direction of total returns is set to be swayed by the moves in underlying interest rates

The other detail worth noting is that unlike the last time the market witnessed such a  significant fall – just after Donald Trump’s US presidential election success – the recent poor performance, was driven both by interest rates and credit spreads.

It is also the first time that both the credit and rate component of returns fell into the red since December 2015 – when an overly-hawkish US Federal Reserve was pushing yields higher and undermining risk appetite. Such positively correlated moves downwards do not happen very often and we do not expect that to change over the course of the year.