DWS Invest Green Bonds ND | DWS (2024)

What a difference a year makes: Had the FED been outright hawkish in December 2022, the tone after the December 2023 FED meeting brought a pivotal change: While central bank rates itself have been kept unchanged, the FED admitted that they might be done with hiking and that 2024 should finally bring lower rates. And while the ECB tried to be less market friendly citing ongoing risks to price stability and the intention to reduce their security holding next year, the markets clearly followed the FED: All risk markets and corporate bonds in particular advanced as investors tried to capture attractive all-in yields before it is too late. And as new issue activity dried down for seasonal reasons early in December, secondary markets were well supported, and spreads tightened slightly but steady. While subordinated and HY debt was particularly sought after, most issuers recorded tighter spreads, as investors’ interest was met by low inventory of traders going into year end. The EUR iBoxx Corporate All returned 2.76% in December. While Financials advanced by 2.57%, Non-Financials returned +2.89%, Corporates overall slightly underperformed German bunds, which returned 3.46%.

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FOMO (fear of missing out) has arrived in fixed income markets: After central banks have paused hiking in November and inflation surprised on the downside, investors eagerly tried to capture the rally in rates and credits. Following the end of the earnings blackout period at the beginning of the month, issuance sprung back to life in the second half with healthy levels of new supply. Most of the new issue order books were oversubscribed multiple times leaving limited new issue premia on the deals. On the other hand, as market participants were still looking for opportunities to invest cash (on the back of significant inflows into the asset class), the secondary market was well supported, and decreasing yields exerted additional pressure to put the money to work: As a result, all market segments tightened during the month, with financials outperforming their non-financial peers in spread terms. The EUR iBoxx Corporate All returned 2.34% in November. While Financials advanced by 2.21%, non-financials returned +2.43%, with the latter outperforming financials. Corporates overall slightly underperformed German bunds, which returned 2.58%.

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October was a weak month for risk markets: In particular, the attack by Hamas on Israel added to concerns regarding geopolitical tensions and a wider escalation. Oil prices increased noticeably following the attack, which does not bode well for the hope for less inflationary pressure. Simultaneously, the beginning of the earnings season revealed several companies with lower growth rates or profit warnings. While central banks appear to be nearing the end of recent path of rate hikes, macroeconomic data gave little room to support the hope of upcoming rate cuts anytime soon.In the nervous market new issuance activity hit the lowest level for an October since 2008 when the Great Financial Crisis unfolded. The few new issues that did come, came at a large discount, causing secondary bonds to widen. With the disappointing companies results coupled with macro unpredictability and geopolitical turmoil October led to wider spreads.The EUR iBoxx Corporate All returned 0,43% in October. While Financials advanced by 0.47, Non-Financials returned +0.40%, with the latter again underperforming Financials. Corporates outperformed like German bunds significantly, which returned +0.31%.

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Central banks played a crucial role for credit markets in September: While the U.S. Fed did pause in hiking, their guidance for the months to come disappointed investors, which moved the timing of expected rate cuts towards the second half of 2024. At the same time, the ECB hiked rates further and their wording gives credit to the expectation of higher rates for longer. Oil prices extended their rising trend, dampening the hope for relief on the inflation front. The resulting significant rise in interest rates hampered risk sentiment. Conversely, the strong new issue activity after the summer pause was met by solid investor demand for attractive new issues, which – on the back of higher benchmark interest rates – are looking increasingly attractive not only in spread terms, but also with all-in yields not seen in more than a decade. So underlying support for the asset class appears to be intact.On a broad index level, the EUR iBoxx Corporate All returned -0.88% in September. While Financials declined by -0.58%, non-Financials returned -1.10%, with the latter again underperforming Financials. Corporates outperformed like German bunds significantly, which returned -2.33%.

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August did not offer comfort to either risk assets or to corporate bonds: Apart from increased rate volatility, several other credit relevant factors caused credit spreads to widen. Fitch downgraded the U.S. Credit rating from AAA to AA+, turning market participants focus to budget deficits again. In Europe, inflation remains sticky and is decreasing slower than anticipated by the European Central Bank (ECB). Economic growth rates remain subdued, China's property sector experienced further trouble. While most of the month was rather quiet in terms of new issue activity, the last couple of days brought a flurry of new issues including multi tranches and corporate hybrid deals amounting to a total volume of close to EUR 30bn. All of it has been absorbed fairly easily with mostly good oversubscription level, although the new issue concessions caused some additional widening, especially in non-Financials.

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