Sovereigns outperform as investors rush for cover Continuing market volatility into the start of 2016 has put investors on the back foot, with sovereign bonds favoured over corporate and emerging market debt.

Developed nation sovereign bonds outperform; Markit iBoxx £ Gilts index returning 3.8%

Among emerging markets, Mexican and Brazilian sovereign bond returns beat peers

Half of the global fixed income ETF inflows last month were into US treasury bond funds 2016 started abruptly for investors as a sharp drop in China’s stock market induced volatility which spread among broader financial assets. This volatility set the tone for risk sentiment throughout last month. In bond markets, investors shunned riskier corporate bonds in favour of safer government and sovereign debt, particularly that of developed nations. US treasuries returned 2.2% on a total return basis, driven by longer maturity bonds flattening the short end of the yield curve, despite a hike in interest rates last December. But it was European sovereign debt that outperformed among bond classes, with UK gilts returning 3.8% while German bunds returned a steady 2.5%. Peripheral European sovereigns performed marginally worse, with Spain returning 1.6%, with the riskier Portugal the odd one out, returning -0.85%. Inflation-linked bonds performed positively on the whole last month, with UK inflation-linked gilts returning 5.4% as investors adjusted future inflation expectations amid an unexpected rise in December’s official figures. Corporate bonds underperformed overall, with the high yield (HY) bond market scarred again by a fresh downturn in commodity prices. US HY, which is highly exposed to commodity prices, continued its slide which started towards the back end of last year, with a -1.2% return last month. Both UK and European HY also saw returns last month fall into the red.

Broadly, there were only three sectors in the investment grade (IG) corporate bond market which saw negative returns last month; Basic materials, Oil & Gas and Insurance. All other sectors benefitted from the risk off sentiment in the market. In Euros, Technology was the outperformer, returning 1.79% last month, while in sterling it was the defensive Health Care index that saw its bonds return 2.42%. It was a similar story in US IG, with Health Care the best performing sector index, returning 1.22% on a total return basis last month. Emerging markets continued to stall coming into 2016, impacted by falling currencies and the prospect of lower future economic growth. Russian government bonds returned over 30% last year but a fresh plunge in oil prices over the past month has accelerated another selloff. Government bond returns in India and Turkey underperformed their developed nation rivals, while a late surge in commodity prices boded well for Brazilian bonds. Another bright spot was Mexico, where bonds have returned 1.3% so far this year helped by the healthy expansion in its manufacturing industry, with latest Markit PMI coming reading 52.4; signalling growth. ETFs Fixed income ETF flows last month were dominated by inflows into funds tracking US treasury bonds. Over $8.4bn capital flowed into these funds, making up over 50% over the total inflows for all fixed incomes ETFs globally last month. ETFs tracking European corporate bonds saw $377m of outflows last

Markit iBoxx Monthly

January 2016

Markit Fixed Income Research

month, despite the best efforts of ECB president Mario Draghi’s dovish rhetoric.

Markit Fixed Income Research

Asset class overview – January 2016/year to date Sovereign unless stated

2.2%

3.8%

2.5%2.3%

1.3%1.6%

0.2%

-1.2%

0.5%

-1.0%

0.7%

-0.4%

0.2%

-0.3%

1.4%

-0.8%

0.1%

0.6%0.9%

1.3%

1.9%

5.4%

1.7%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

US

UK

Ge

rma

ny

Fra

nce

Ita

ly

Sp

ain

US

IG

US

HY

EU

IG

EU

HY

UK

IG

UK

HY

EM

So

v U

SD

EM

Co

rp U

SD

Bra

zil

Ru

ssia

Ch

ina

Ind

ia

Tu

rke

y

Me

xic

o

US

UK

Ge

rma

ny

Markit Fixed Income Research

Tables - Euros

Markit iBoxx Index

Month YTD Current Month YTD Current Month YTD

€ Overall 1.54% 1.54% 0.99% -0.22% -0.22% 71.8 8.2 8.2 3,252 6.3

Sovereigns

€ Germany 2.50% 2.50% 0.42% -0.32% -0.32% -0.8 -0.2 -0.2 51 7.3

€ France 2.26% 2.26% 0.82% -0.26% -0.26% 40.4 5.6 5.6 43 7.6

€ Italy 1.27% 1.27% 1.49% -0.16% -0.16% 114.8 16.4 16.4 64 6.8

€ Spain 1.61% 1.61% 1.52% -0.22% -0.22% 123.9 9.3 9.3 35 6.4

€ Portugal -0.85% -0.85% 2.48% 0.17% 0.17% 226.3 48.6 48.6 12 6.1

€ Ireland 1.58% 1.58% 0.78% -0.23% -0.23% 57.5 6.7 6.7 12 6.2

Corporates

€ Corporates 0.52% 0.52% 1.70% -0.08% -0.08% 172.7 19.2 19.2 1,734 5.0

€ Corporates A 0.79% 0.79% 1.34% -0.14% -0.14% 136.9 13.5 13.5 706 5.0

€ Corporates AA 1.24% 1.24% 1.07% -0.22% -0.22% 101.3 7.8 7.8 176 5.4

€ Corporates AAA 1.82% 1.82% 1.13% -0.25% -0.25% 83.9 7.8 7.8 6 6.8

€ Corporates BBB 0.04% 0.04% 2.28% 0.02% 0.02% 233.6 28.3 28.3 846 4.8

€ Financials 0.44% 0.44% 1.63% -0.08% -0.08% 173.7 17.5 17.5 646 4.5

€ Banks 0.61% 0.61% 1.25% -0.13% -0.13% 141.2 12.0 12.0 439 4.1

€ Insurance -0.86% -0.86% 3.40% 0.16% 0.16% 333.0 45.4 45.4 88 6.0

€ Non-Financials 0.58% 0.58% 1.75% -0.08% -0.08% 172.1 20.3 20.3 1088 5.4

€ Basic Materials -0.21% -0.21% 3.14% -0.03% -0.03% 317.9 22.8 22.8 78 5.0

€ Consumer Goods 0.83% 0.83% 1.52% -0.14% -0.14% 149.2 14.6 14.6 223 5.3

€ Consumer Services 0.21% 0.21% 1.94% -0.03% -0.03% 190.7 26.9 26.9 82 5.8

€ Health Care 1.15% 1.15% 1.36% -0.18% -0.18% 130.9 11.5 11.5 50 5.8

€ Industrials 0.86% 0.86% 1.33% -0.15% -0.15% 137.6 12.4 12.4 179 4.9

€ Oil & Gas 0.24% 0.24% 2.23% 0.07% 0.07% 215.1 36.7 36.7 89 5.7

€ Technology 1.79% 1.79% 1.19% -0.23% -0.23% 101.9 9.1 9.1 21 7.2

€ Telecommunications 0.90% 0.90% 1.76% -0.14% -0.14% 166.8 15.6 15.6 120 5.5

€ Utilities 0.18% 0.18% 1.77% -0.02% -0.02% 176.3 26.6 26.6 246 5.3

€ Covered 0.88% 0.88% 0.54% -0.18% -0.18% 64.4 8.0 8.0 698 4.5

High Yield

€ High Yield -1.03% -1.03% 5.61% 0.31% 0.31% 579.6 57.4 57.4 537 3.7

€ High Yield B -1.33% -1.33% 7.36% -0.11% -0.11% 754.0 11.2 11.2 193 3.4

€ High Yield BB -0.78% -0.78% 4.66% 0.30% 0.30% 481.6 56.2 56.2 311 3.8

€ High Yield CCC -3.57% -3.57% 13.84% 1.01% 1.01% 1412.9 137.1 137.1 32 3.2

Inflation-linked

€ France Inflation-Linked 1.44% 1.44% -0.31% -0.18% -0.18% 0.0 0.0 0.0 19 7.7

€ Germany Inflation-Linked 1.74% 1.74% -0.55% -0.23% -0.23% 0.0 0.0 0.0 6 7.3

€ Italy Inflation-Linked -0.14% -0.14% 0.73% 0.03% 0.03% 0.0 0.0 0.0 10 7.8

ABS

Europe ABS 1.62% 6.45% 788

Contingent Convertible

€ Contingent Convertible -2.66% -2.62% 6.67% 0.88% 0.88% 29 4.3

Total Return Yield OAS Bonds Duration

Markit Fixed Income Research

US Dollar

Markit iBoxx Index

Month YTD Current Month YTD Current Month YTD

$ Overall 1.49% 1.49% 2.83% -0.24% -0.24% 80.2 2.3 2.3 5989 6.1

Sovereigns

$ Treasuries  2.23% 2.23% 2.00% -0.32% -0.32% -4.8 -6.2 -6.2 254 6.2

$ Treasuries 1-3Y 0.60% 0.60% 0.82% -0.27% -0.27% -1.5 -4.6 -4.6 91 1.8

$ Treasuries 3-5Y 1.68% 1.68% 1.19% -0.41% -0.41% -7.2 -6.2 -6.2 61 3.7

$ Treasuries 5-7Y 2.58% 2.58% 1.52% -0.44% -0.44% -7.6 -5.1 -5.1 39 5.5

$ Treasuries 7-10Y 3.12% 3.12% 1.82% -0.39% -0.39% -6.4 -4.8 -4.8 18 7.5

$ Treasuries 10-15Y 3.25% 3.25% 2.09% -0.33% -0.33% -3.5 -7.5 -7.5 11 9.2

$ Treasuries 15Y+ 5.31% 5.31% 2.66% -0.29% -0.29% -3.6 -7.2 -7.2 34 17.4

Corporates

$ Corporates  0.19% 0.19% 4.33% -0.02% -0.02% 228.0 26.2 26.2 4,752 6.4

$ Corporates A 0.60% 0.60% 3.77% -0.06% -0.06% 174.9 21.4 21.4 1898 6.1

$ Corporates AA 0.85% 0.85% 3.46% -0.11% -0.11% 143.7 17.2 17.2 525 6.0

$ Corporates AAA 1.10% 1.10% 3.53% -0.10% -0.10% 124.8 16.7 16.7 66 8.6

$ Corporates BBB -0.44% -0.44% 5.12% 0.06% 0.06% 304.9 34.8 34.8 2263 6.8

$ Banks 0.42% 0.42% 3.66% -0.06% -0.06% 190.5 23.8 23.8 994 4.7

$ Basic Materials -1.90% -1.90% 6.29% 0.23% 0.23% 427.6 53.4 53.4 253 6.4

$ Consumer Goods 0.88% 0.88% 3.78% -0.10% -0.10% 179.5 17.7 17.7 436 5.8

$ Consumer Services 0.50% 0.50% 4.44% -0.03% -0.03% 221.9 22.9 22.9 416 8.1

$ Financials 0.52% 0.52% 3.77% -0.07% -0.07% 193.0 21.5 21.5 1579 5.2

$ Health Care 1.22% 1.22% 3.84% -0.12% -0.12% 167.7 15.0 15.0 373 7.5

$ Industrials 1.12% 1.12% 3.96% -0.14% -0.14% 181.4 14.1 14.1 397 7.2

$ Insurance 0.43% 0.43% 4.42% -0.03% -0.03% 226.1 24.9 24.9 218 7.5

$ Non-Financials 0.00% 0.00% 4.57% 0.01% 0.01% 243.0 28.4 28.4 3173 7.2

$ Oil & Gas -2.55% -2.55% 5.92% 0.38% 0.38% 388.3 69.4 69.4 589 6.6

$ Technology 0.46% 0.46% 3.86% -0.04% -0.04% 178.3 25.2 25.2 214 6.7

$ Telecommunications -0.06% -0.06% 4.83% 0.04% 0.04% 256.4 31.2 31.2 159 8.3

$ Utilities 0.96% 0.96% 4.49% -0.09% -0.09% 223.3 15.7 15.7 336 8.3

High Yield

$ Liquid High Yield -1.24% -1.24% 8.36% 0.25% 0.25% 674.3 61.0 61.0 977 4.2

Inflation-linked

$ TIPS Inflation-Linked 1.90% 1.90% 0.69% -0.23% -0.23% 0.0 0.0 0.0 36 8.2

Emerging Markets

$ EM Sovereigns  0.22% 0.22% 5.77% -0.03% -0.03% 371.2 25.0 25.0 328 6.9

$ EM Corporates -0.28% -0.28% 6.44% 0.06% 0.06% 471.7 37.4 37.4 1381 4.5

Loans

$ Leveraged Loans -0.78% -0.78% 1206

RMBS

$ US RMBS Seniors -0.72% -0.72% 306

Convertible

$ CVBX -6.75% -6.74% 1.99% 1.08% 1.08% 96 6.4

Contingent Convertible

$ Contingent Convertible -1.85% -1.94% 7.58% 0.45% 0.45% 50 4.7

Total Return Yield OAS Bonds Duration

Markit Fixed Income Research

Sterling

Markit iBoxx Index

Month YTD Current Month YTD Current Month YTD

£ Overall 3.09% 3.09% 2.33% -0.30% -0.30% 40.1 3.3 3.3 1053 10.0

Sovereigns

£ Gilts 3.83% 3.83% 1.98% -0.33% -0.33% -0.1 0.0 0.0 39 10.8

£ Gilts 1-3 0.63% 0.63% 0.38% -0.33% -0.33% 18.2 8.5 8.5 5 1.8

£ Gilts 3-5 1.65% 1.65% 0.75% -0.43% -0.43% -0.8 -1.4 -1.4 6 3.6

£ Gilts 5-7 2.38% 2.38% 1.08% -0.43% -0.43% -9.7 -1.6 -1.6 5 5.3

£ Gilts 7-10 3.17% 3.17% 1.47% -0.39% -0.39% -7.3 -0.2 -0.2 4 7.7

£ Gilts 10-15 4.06% 4.06% 1.82% -0.29% -0.29% -2.6 2.0 2.0 3 10.4

£ Gilts 15+ 6.27% 6.27% 2.27% -0.31% -0.31% 1.4 0.0 0.0 16 18.7

Corporates

£ Corporates 0.65% 0.65% 3.88% -0.06% -0.06% 212.7 30.2 30.2 697 7.9

£ Corporates A 0.75% 0.75% 3.75% -0.07% -0.07% 193.7 29.3 29.3 274 8.5

£ Corporates AA 1.55% 1.55% 3.18% -0.17% -0.17% 133.5 19.9 19.9 76 8.8

£ Corporates AAA 3.87% 3.87% 2.73% -0.25% -0.25% 61.8 7.8 7.8 5 14.4

£ Corporates BBB 0.30% 0.30% 4.27% 0.00% 0.00% 260.4 36.4 36.4 342 7.1

£ Banks 0.39% 0.39% 3.73% -0.03% -0.03% 217.0 34.7 34.7 147 6.3

£ Basic Materials -2.44% -2.44% 5.82% 0.45% 0.45% 419.4 83.3 83.3 11 6.6

£ Consumer Goods 1.11% 1.11% 3.16% -0.19% -0.19% 168.3 19.0 19.0 60 5.7

£ Consumer Services 1.43% 1.43% 3.67% -0.14% -0.14% 182.0 21.6 21.6 56 8.9

£ Financials 0.35% 0.35% 3.93% -0.03% -0.03% 230.6 34.3 34.3 289 6.8

£ Health Care 2.42% 2.42% 3.55% -0.18% -0.18% 149.2 17.2 17.2 12 12.3

£ Industrials 1.35% 1.35% 3.54% -0.12% -0.12% 174.7 24.1 24.1 43 8.5

£ Insurance -0.95% -0.95% 4.99% 0.15% 0.15% 336.6 52.8 52.8 71 7.0

£ Non-Financials 0.85% 0.85% 3.86% -0.08% -0.08% 203.3 28.2 28.2 408 8.6

£ Oil & Gas -0.47% -0.47% 3.55% 0.11% 0.11% 191.4 48.5 48.5 19 6.7

£ Telecommunications 0.61% 0.61% 4.17% -0.03% -0.03% 234.5 32.7 32.7 43 8.5

£ Utilities 0.75% 0.75% 4.02% -0.06% -0.06% 214.5 29.8 29.8 160 9.5

Collateralized

£ Collateralized 2.55% 2.55% 3.31% -0.26% -0.26% 149.8 9.6 9.6 166 8.8

£ Covered 2.93% 2.93% 2.34% -0.40% -0.40% 81.8 -1.1 -1.1 22 7.0

£ ABS 2.06% 2.06% 3.49% -0.21% -0.21% 168.2 14.8 14.8 32 8.5

£ MBS 1.83% 1.83% 3.30% -0.22% -0.22% 163.4 14.7 14.7 41 7.1

£ Housing Associations 3.58% 3.58% 3.80% -0.23% -0.23% 161.9 10.4 10.4 42 14.4

High Yield

£ High Yield -0.40% -0.40% 6.44% 0.33% 0.33% 522.4 68.6 68.6 43 3.8

Inflation-linked

£ Gilt Inflation-Linked 5.38% 5.38% -0.92% -0.23% -0.23% 0.0 0.0 0.0 25 23.3

Contingent Convertible

£ Contingent Convertible 1.29% 2.76% 7.62% -0.13% 0.86% 0.0 0.0 0.0 8 5.6

Total Return Yield OAS Bonds Duration

Markit Fixed Income Research

Charts - Euros

Yield

Total Return

0

0.5

1

1.5

2

2.5

€ Corporates € Eurozone

92

94

96

98

100

102

104

106

108

110

112

€ Corporates € Eurozone

Markit Fixed Income Research

Asset swap spread

Curve steepness

0

50

100

150

200

250

AS

W (

bp

s)

€ Corporates AAA € Corporates AA

€ Corporates A € Corporates BBB

0

20

40

60

80

100

120

140

Bp

s

2s10s 10s30s

Markit Fixed Income Research

US Dollar

Yield

Total Return

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

$ Treasuries $ Corporates

96

97

98

99

100

101

102

103

104

$ Treasuries $ Corporates

Markit Fixed Income Research

Asset swap spread

Curve Steepness

0

50

100

150

200

250

300

350

AS

W (

bp

s)

$ Corporates AAA $ Corporates AA

$ Corporates A $ Corporates BBB

0

20

40

60

80

100

120

140

160

180

200

Bp

s

2s10s 10s30s

Markit Fixed Income Research

Sterling

Yield

Total Return

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

£ Corporates £ Gilts

90

92

94

96

98

100

102

104

106

£ Corporates £ Gilts

Markit Fixed Income Research

Asset swap spread

Curve steepness

0

50

100

150

200

250

300

Bp

s

£ Corporates AAA £ Corporates AA

£ Corporates A £ Corporates BBB

0

20

40

60

80

100

120

140

160

180

Bp

s

2s10s 10s30s

Markit Fixed Income Research

Risk free yield curves - Euros

-1

-0.5

0

0.5

1

1.5

2

0 10 20 30 40 50 60

Current

Month

Quarter

Year-to-date

Markit Fixed Income Research

US dollar

Sterling

0

0.5

1

1.5

2

2.5

3

3.5

4

0 5 10 15 20 25 30 35

Current

Month

Quarter

Year-to-date

3 year

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

0 10 20 30 40 50 60

Current

Month

Quarter

1 Year

3 year

Markit Fixed Income Research

ETF Flows

Neil Mehta

Fixed Income Analyst

Markit

Tel: +44 207 260 2298

Email: neil.mehta@markit.com

For further information, please visit www.markit.com

Type Europe* USA* Asia* Total Europe* USA* Asia* Total

Broad Market 113 3,064 34 3,211 113 3,064 34 3,211

Sovereigns 2,557 8,407 (293) 10,671 2,557 8,407 (293) 10,671

Sub-Sovereigns 0 744 21 764 0 744 21 764

Corporates IG (579) 415 0 (164) (579) 415 0 (164)

Covered 83 (1) 0 82 83 (1) 0 82

Convertible 8 (39) 0 (32) 8 (39) 0 (32)

High Yield (293) 276 0 (17) (293) 276 0 (17)

Loans 0 0 0 0 0 0 0 0

Asset Backed 0 (128) 0 (128) 0 (128) 0 (128)

CDS 42 (8) 0 34 42 (8) 0 34

Inflation 401 263 0 664 401 263 0 664

Money Market 36 0 (621) (585) 36 0 (621) (585)

Preferred Stock 0 459 (27) 431 0 459 (27) 431

Yield-Curve Strategy 0 0 0 0 0 0 0 0

Total 2,368 13,451 (886) 14,932 2,368 13,451 (886) 14,932

Jan-16 YTD

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