In the last months the markets continued the rally that had emerged somewhat unexpectedly in January. While the US experienced a government shutdown, the downward adjustment of future interests by FED due to slowed economic dynamism contributed to a regain of investors’ confidence and by this means fueled particularly equity markets. Until end of March, US S&P 500 was up 13% and Eurozone equities gained almost 12%.
On the other hand, the bond market situation is alerting. An increasing number of market participants is concerned about the high yield bond market and about private debt funds. This fear can be observed by tracking equity and bond volatilities with bond volatility being higher than equity volatility. Further, the US yield curve in March formally inverted (when applying the typical definition of calculating the spread between ten- and two-year yields), yielding to a manifestation of the various interpretations coming along with it .
Apart from the developments for corporate debt, we observe other sources for uncertainty, e.g. a deflation of the tech bubble, unresolved tariff conflicts, the struggling economy in China and recession threats in Europe. Combined, those issues persuaded us to leave our conservative allocation of Persephone’s reference portfolio unchanged throughout the first quarter of 2019.