Despite the usual poor liquidity in December and the wave of infections that have been particularly strong, the bond market proved to be resilient throughout the year-end period, with investors focusing on positive health signals such as effectiveness of vaccines. Flash estimate of the Euro-zone composite purchasing managers’ index fell to a nine-month low of 53.4 in December. Inflation continued to accelerate, and central banks finally took steps to wind down their pandemic-related stimulus measures. The UK and Norway raised interest rates, and a raft of emerging markets also increased rates during the month. In the US, the Federal Reserve (Fed) pledged to accelerate the tapering of its bond-purchase programme, which is now scheduled to end in March 2022. Officials also projected that the Fed may raise interest rates three times in 2022. The European Central Bank also said it would scale back its asset purchase programme by March 2022 although it indicated that interest rates were unlikely to rise until at least 2023.The yield on the 10-year German Bund rose from around -0.35% at the end of November to around -0.18% at the end of December.
Given this context, the Euro investment grade market generated a positive excess return of +0.81% and a negative total return of -0.11% in December. By sector, Insurance outperformed with +0.07% followed by Consumer Cyclicals (+0.05%) while Industrials (-0.37%) and Consumer non-cyclicals (-0.33%) underperformed over the month. The Euro High Yield market delivered a positive performance over the month (+0.86% for the BB-B index). By sector, energy (+1.72%) and retail (+1.53%) outperformed, while utilities (+0.30%) and technologies (+0.18%) underperformed in relative terms. Over the month, new supply was minimal (€ 6 bn against € 58 bn in November), coming mostly with thematic issuance such as Green, Social, Sustainability or Sustainability-linked bonds. Adding to inflation, volatility on rates and rise of the Bund’s yield, euro investment grade spreads tightened by 13 bps. European HY primary market activity also slowed down significantly in December (€1.4bn). Spreads tightened by 36 bp during the month (form 355 bp to 319 bp for the ICE BofAML Euro High Yield BB-B Constrained index).
The Carry bucket contribution was strongly positive (+0.61%) amid strong pull-back of all credit spreads, with a tightening mainly stemming from a relief on interest rates volatility and end-of-year liquidity fallback.
The Market Timing strategies were slightly positive (+0.02%) with low volumes of issuance in December.
The Relative value strategies were slightly negative (-0.05%). Homogeneous decompression of CDS spreads went on, leading to an underperformance of long-short bucket during the month.
Both European Investment Grade and High Yield markets finished the year positively. Technical factors will likely remain supportive in the beginning of January if the broader market remains stable, as dealers will need to rebuild inventory with a primary market restarting gradually. This primary market is expected to break records in 2022, boosted by M&A activity, cash replenishment and sustainable investments. Liquidity should start to pick up gradually. Markets seem to have started to look past the Omicron variant, but the evolution of the sanitary situation and the energy crisis in Europe could still be a concern. The path of growth and inflation will be closely monitored by centrals banks in order to adapt their “tapering” which likely continues to drive long-term rates and could have an impact on risk sentiment. Nevertheless, the European High Yield market continues to be well supported by the sustained hunt for yield as the ECB support remains strong.
At the end of December, IG represented around 14% of the portfolio and the risk profile remained low with interest rate duration and credit duration of 2.52 and 2.59 respectively.

2020 was anything but what we expected, as COVID-19 hit hard in Q1 and life hasn’t been the same since then. Global equities entered an official bear market in March, with the MSCI All Country World Index falling 21%, its worst quarter since 2008. The 10-year German Bund touched an all-time low in March at -0.85% before spiking up by +65 bp within 10 days. Central banks were quick to provide support across the world with emergency rate cuts and monetary stimulus. Markets rebounded strongly in Q2 on the back of additional and unprecedented fiscal measures. Overall, 2020 turned out to be a year of slowdown of global economic growth accompanied by exceptional performance of the financial markets. March was the worst month ever since the launch of the strategy but was more than compensated by a significant rebound in Q2; the fund posted a substantial gross return of +3.94% over the year.
The Carry bucket contributed almost half of the portfolio’s global performance (+1.90% or 48% of total performance) as spreads grinded back to the levels they were at the beginning of 2020 in € IG (flat) and almost in € HY BB-B universe (+39 bp).
The Market Timing bucket also contributed positively (+1.31% or 33% of total performance) benefiting from an active Primary market, both on IG and HY.
The Relative Value bucket contributed positively (+0.73%), especially in March when volatility spiked (VIX Index @ 83 or +477% since Feb. 21st when the market sell-off started). These strategies thrive on volatility peaks and spread dispersion and bring additional alpha to mitigate Mark-to-Market losses Going forward volatility could pick up slightly as markets focus might temporarily shift to the worrying evolution of the Covid-19 crisis. However, markets will continue to benefit from extraordinary Central Banks support and from the hunt for yield, providing a safety net for investors. Our positioning was tilted towards high quality and Investment Grade overweight over the year.

€ IG credit absolute return in December posted a small negative -0.05% (+6.3% YtD), impacted by rising German 10Y rates up to -0,18% (+10 bp) while € HY was positive at +1% (close to +11% YtD). € IG Primary market broke a record with € 630 bn of new bonds issued over the year, whereas € HY was very light as always by year-end (total € 87 bn in 2019). The Carry bucket contributed significantly (+0.26%) to the portfolio’s global performance supported by global spread compression. General Motors 2022 and Ball 2023 bonds performed remarkably well. The Market Timing bucket also contributed positively (+0.18%) to global performance benefiting from an active Primary market on € IG, less so on € HY. Among the best contributors were Jab Holding 2039 for IG and Kiloutou 2026 for HY with spread tightening post issuance. The Relative Value bucket contributed negatively (-0.03%) in an environment of global spread compression. Decompression trade iTraxx Main 5y vs Suedzucker 5y was closed. Our positioning was still tilted towards Investment Grade overweight (around 45%). Interest rate duration was 1.11 and spread duration was 0.91 at the end of December. We should keep this positioning for the months to come.