Global fixed income focus - October 2016

Global markets remained relatively calm ahead of the US presidential elections in November, while continued signs of strength in US manufacturing and an uneventful US labour report increased overall expectations for a Fed rate increase in December and the US dollar continued to strengthen as the month progressed. Increases in crude oil prices during the month helped to rejuvenate interest in some already battered energy companies' debt as evidenced by tighter spreads in that sector, while the expectations of greater US regulatory scrutiny continues to weigh heavily on healthcare (Figure 1).

• Most leveraged loan sectors were wider on the month with the exception of some modest tightening across most of the consumer goods sector and significant tightening across the energy sector
• The global CDS sector credit curve steepened slightly in October, with the AAA/AA and AA/A basis remaining unchanged during the month at +15bps and +12bps respectively, while the A/BBB basis tightened 1bp to a new one year low of +31bps. However, the lower end of the curve steepened modestly, with BB/B 1bp wider to +99bps and B/CCC 7bps wider to +475bps
• Pressure on the pound drove 10-year UK gilts a significant 49bps wider to end the month at a 1.14% yield. Given the sharp sell-off in these UK benchmark government bonds, it was no surprise that the Markit iBoxx " Corporate AAA Index was the worst performing index at -5.6% on a total return basis, but it's worth noting that it still has a strong 16.6% total return year to date
• CDS spreads indicated an increased optimism in sovereign credit for developed countries during October, as every G7 country's CDS spread tightened during the month
• Total municipal bond issuance surged to $52.7bn in October, which was the largest single month of issuance in 30 years. Year to date revenue bond issuance is now 14% higher and general obligation issuance 10% higher than the same period last year
• Securitised products spreads were mixed in October, with spreads tighter for CLOs and modestly wider for some consumer ABS and most non-agency MBS. It was an unusually busy month for US auto ABS issuance, as almost $12bn in supply entered the market, which makes it the busiest month since last October when almost $13bn was priced

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