MainStay Investments presents insights from the MacKay Shields Global Fixed Income Team, subadvisors to several MainStay fixed-income funds.
Riskier assets continued to rally in April as investors maintained confidence in the sustainability of economic growth in the U.S., and improving conditions in Europe. U.S. equities, as measured by the S&P 500 Index, climbed 1.9% and U.S. high yield, as measured by the Bank of America-Merrill Lynch (BAML) U.S. High Yield Master II Constrained Index, rose 1.8%. The BAML European High Yield Index delivered a 2.7% return, but the BAML Emerging Market High Yield Index lagged with a 0.7% return in April. The U.S. dollar strengthened against the Japanese Yen, but fell more than 2% against the Euro and Sterling. Commodities such as crude oil and precious metals fell during the month, but bucking the trend was a nearly 7% rise in natural gas prices.
The catalyst driving the world markets higher was the growing momentum in the U.S. economic recovery. As stated in our previous letter, housing and auto sales are two important cyclical sectors that are accelerating and contributing to domestic growth in a meaningful way. Similarly, the labor markets are also improving, notwithstanding the temporary pull-back in the initial 88,000 non-farm payrolls release from March (note, at the time of this letter and following the April release, the March figures were revised upward to 138,000). The unemployment rate has since dropped to 7.5% and the size of the labor force has expanded, while the labor force participation rate held at around 63%, according to the Bureau of Labor Statistics. Meanwhile, inflationary pressures dissipated with core Consumer Price Index, a measure that excludes food and energy items, printing at 1.9% year-over-year. Price declines were seen in apparel and household furnishings, while gains were witnessed in shelter, used vehicles, and airline fares. Inflation held below the Fed's stated target of 2.5%, which underscores the low risk of Fed tightening for the foreseeable future.
While economic data in the U.S. provided a boost to the financial markets, Europe faced ongoing challenges across many of the peripheral countries that try to climb out of a recession while dealing with elevated debt levels. Additionally, following several weeks since the Italian elections failed to produce a government, a new prime minister was finally elected in left-leaning Enrico Letta. The new prime minister was tasked with lifting Italy out of a debilitating economic recession and improving its electoral system to prevent similar political instability. Italy, like some of its European Union peers, is an example of the difficulty in balancing austerity and pro-growth reforms. The markets, however, welcomed the re-election with 10-year Italian government bond yields plummeting on renewed investor confidence. Government bond yields in Spain and Portugal also rallied.
In what was viewed as a surprise to the markets, the Bank of Japan (BOJ) announced, under new leadership, it would further expand its monetary base twofold by purchasing Japanese government bonds of any maturity, in addition to stocks and property-linked assets. The goal of the program, according to the BOJ, is to stimulate growth and raise the inflation rate to 2% as the country has battled a difficult deflationary cycle for nearly two decades. The Nikkei Index rallied 12.4% (local) during the month on the quantitative easing announcement.
In the U.S., Treasury rates fell during the month of April with the benchmark 10-year rate closing at 1.67%, or 18 basis points lower from the prior month.
Treasury Yield Curve
Source: Bloomberg, 4/30/13. Past performance is no guarantee of future results.
The U.S. economy continues its slow path of recovery, and the current climate of moderate economic growth readily supports valuations in the credit markets. The strong demand for yield in the current low rate environment is another important factor, as is the fundamental health of the issuer base, which we believe is in the best shape we have seen in years. Important credit metrics such as balance sheet liquidity, leverage ratios, debt service costs, and access to capital appear attractive across issuers and industries. The U.S. economy has been very resilient to date, and market participants have become much less concerned with the macro-related volatility.