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Commentary by Kunal Mehta, CFA, senior investment specialist, fixed income

Fixed income markets remained broadly positive in May despite lingering concerns about inflation as the rise in commodities prices, such as oil and precious metals, continued uninterrupted and the strength of US April inflation data took investors by surprise. Month-on-month (m-o-m) US headline inflation was 0.8%, versus consensus forecasts for 0.2%. This was also the highest m-o-m inflation reading since 19811. Elsewhere, the Bank of England kept monetary policy on hold and asset purchases unchanged. It did, however, highlight that purchases could be slowed going forward. Meanwhile, the European Central Bank chose not to comment on its intentions regarding asset purchases.

Monthly performance by market

Global government bondsCorporate bondsEmerging market bonds
Bloomberg Barclays Global Aggregate Treasuries (USD Hedged)Bloomberg Barclays Global Aggregate GBP Corporate (USD Hedged)Bloomberg Barclays Global Aggregate EUR Corporate (USD Hedged)Bloomberg Barclays Global Aggregate USD Corporate (USD Hedged)Bloomberg Barclays Global High Yield (USD Hedged)JP Morgan Emerging Markets Bond Index EMBI Global Diversified (USD Hedged)

Source: Bloomberg Barclays, 30 April 2021 to 28 May 2021. Bloomberg Barclays Indices are used as proxies for each exposure.

Past performance is not a reliable indicator of future results.

Government bonds

In the government bond markets, there continued to be a dispersion in performance. In the US and UK, yield curves steepened mildly, as prices of short-maturity bonds trended lower. In Europe, yields on German Bunds ended the month marginally higher across the curve2

Credit markets

In the credit markets, spreads continued to tighten for investment-grade and high-yield assets. In the case of the latter, this was particularly the case in the emerging markets (EM) segment.

Both in the US and Europe, first-quarter earnings results remained strong, convincingly beating expectations. Many companies also raised their future guidance, reflecting growing optimism around the economic outlook. Although some sectors, such as travel, aren’t yet supported by positive data, sentiment nevertheless remained upbeat amid confidence in vaccine rollouts.

European financials were among the sectors outperforming analysts’ expectations. Banks in particular were ahead of consensus forecasts, helped by lower loan loss provisions and good performance from investment banking activities. Net interest income remained under pressure from low interest rates and excess deposits but fee and commission income rebounded strongly. Insurers also issued generally good results with capital levels appearing to have mostly recovered from the challenges of the first half of last year.

In much of Asia, while economic activity generally has returned to close-to-normal levels, concerns around the supply of semi-conductor components persist and industries further down the supply chain, such automotives, continue to be impacted.  

Credit spread levels

Credit spread levels

Source: Bloomberg Barclays 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. As at 31 May 2021.

Overall, the technical backdrop remained supportive with good liquidity and high cash levels. Though significantly below 2020 levels, supply in May in both euro and US dollars was in line with prior years3. We continue to expect issuance this year to be down significantly from last year’s levels. Demand for new issues remained robust with high book coverage ratios and limited new issue premiums. Demand for green and sustainable assets remained strong.

The stance of central banks continued to be viewed as supportive, although indications of tighter monetary policy are beginning to emerge. Investment flows remained lacklustre and we expect investors to remain sensitive to any recurrence of volatility as a result of changes to expectations for economic recovery and inflation.

Emerging markets

EM credit enjoyed solid performance in May underpinned by a supportive macroeconomic backdrop and favourable supply and demand dynamics. In a continuation of this year’s trend, high-yield bonds outperformed investment-grade bonds, with spreads for the former compressing by 12 basis points while those for the latter narrowed by just 2 basis points.

Volatility stemming from political events in Latin America caused spreads to widen for some higher-quality EM countries. Colombian bonds underperformed after being downgraded to high yield by ratings agency S&P following the withdrawal of pending fiscal reforms as a result of escalating social unrest. Bonds from Chile were weak after the ruling coalition performed badly in the election of a constituent assembly charged with rewriting the country’s constitution.

Better performances came from the high-yield segment. Ecuador outperformed as its incoming government made progress in building a coalition, which could progress a reform agenda. Meanwhile, Ukraine was helped by a de-escalation in tensions between the US and Russia. Egypt and Tunisia also performed well as Egypt continued to make progress on its IMF-supported reform agenda and Tunisia moved closer to procuring IMF assistance.

Emerging market bond spreads

Credit spread levels

Source: Bloomberg, JP Morgan and Vanguard. 3 June 2019 to 31 May 2021.

The technical backdrop was very supportive for EM fixed income, which continued to attract inflows while new issuance was subdued. Only four new sovereign issues, totaling $6.3 billion, came to market during the month. This was against $8.7 billion of coupons and redemptions, marking a second consecutive month of negative net supply4

EM local currency bonds enjoyed another month of strong performance with the GBI-EM index returning 2.3% for May5. A weaker US dollar paired with lower US interest rates and stronger commodity prices was very supportive for the asset class. As vaccination rates continue to improve and growth catches up with the US and other developed markets, we think EM currencies could continue to perform well.


We are maintaining a reduced level of overall credit risk, relative to earlier this year, selectively positioning across the segments of the market that should still benefit from strong investor demand and a steadily improving macroeconomic backdrop. Cyclical sectors, select Covid-19-sensitive segments and pockets of lower-quality securities offer value, but security selection and our comfort around issuer fundamentals will dictate our exposures.

While the macroeconomic outlook is relatively constructive due to vaccine roll-out, we feel much of the good news has already been priced in by the market and there is a risk that markets could overshoot and tighten further, although spreads are close to their highest levels of the last 10 years.

In the near term, risk sentiment is strong but weakening. Against this background and the vaccine roll-out, a ‘risk-on’ reflation trade is a possibility. Though we see few catalysts for significant spread tightening, we also see little possibility of significant spread widening.

As emerging markets recover from the pandemic, credit differentiation should present opportunities to add value. We remain mindful of credits that appear cheap but which could yet experience a fundamental deterioration in their credit profile. Pockets of value remain in high yield and we expect much of this segment of the market to be resilient in the face of further macro shocks.

The recent volatility in high-quality Latin American issuers (such as Chile, Colombia and Peru) has reinforced our view that investment-grade spreads leave little room for any unexpected credit deterioration. We continue to see limited value in the high-quality space and are therefore selectively considering lower-quality exposures.

The seasonally illiquid summer months may provide opportunities in the form of new issues or unexpected market dislocations and we are maintaining flexibility to be in a position to take advantage of these opportunities, should they arise.

We continue to look for credits that have already repriced on the back of issuance pressures and are wary of those that have not. In the high-yield segment, technical factors around supply are likely to be very important in the second half of this year, as many investors are still meaningfully overweight in this part of the market.


1 Bloomberg and U.S. Bureau of Labor Statistics as at 12 May 2021.

2 Bloomberg Barclays as at 31 May 2021.

3 Bloomberg Barclays as at 31 May 2021.

4 JP Morgan as at 31 May 2021.

5 JP Morgan as at 31 May 2021.

Investment risk information

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.

Any projections should be regarded as hypothetical in nature and do not reflect or guarantee 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.

Funds investing in fixed interest securities carry the risk of default on repayment and erosion of the capital value of your investment and the level of income may fluctuate. Movements in interest rates are likely to affect the capital value of fixed interest securities. Corporate bonds may provide higher yields but as such may carry greater credit risk increasing the risk of default on repayment and erosion of the capital value of your investment. The level of income may fluctuate and movements in interest rates are likely to affect the capital value of bonds.

Some funds invest in securities which are denominated in different currencies. Movements in currency exchange rates can affect the return of investments.

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