First, we saw a recovery and stabilisation in the price of crude oil, from a low of around $27 per barrel in February to a range of $40-$50. This in turn relieved some of the pressure on the energy sector, which makes up a significant part of the credit market and the high yield index in particular. Many issuers whose creditworthiness was doubtful at the lower ranges now are viable and their bond prices have recovered from distressed levels. Second, the oil price recovery was beneficial for emerging market assets generally, given that many of those economies depend heavily on commodity exports. Third, we saw government interest rates defy expectations and continue to decline globally, with much of the government bond market slipping into negative yield territory. Long term interest rates declined most sharply and yield curves flattened on speculation that there would be little to no growth or inflation and the four major central banks would be forced to maintain accommodative monetary policy for several years hence.

All that changed in November with Donald Trump’s shock victory in the US Presidential Election. In just a few days we saw yield curves steepen sharply (Figure 1), not just in the US but globally. Many view his policy agenda as likely to foster growth and inflation, and there is probably an element of additional credit risk given his revenue and spending plans, and additionally his comments on the campaign trail (however seriously they should be taken) about renegotiating America’s debt. Combined with the expected fiscal effects of a Trump economic plan, the expectations for the US Federal Reserve (Fed) policy have moved towards a tightening bias.

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