Rising economic confidence among businesses and individuals helped fuel positive market sentiment toward most global risk assets during the quarter. The Federal Reserve (Fed) raised rates in March, a widely anticipated move that acknowledged the strengthening U.S. economy. The Bank of Japan (BOJ), the Bank of England (BOE) and the European Central Bank (ECB) continued to expand their balance sheets, though the ECB will reduce its purchases to €60 billion per month in April. The euro zone avoided a political upset on March 15 when the Dutch elected incumbent Prime Minister Mark Rutte.
A synchronized pickup in global economic activity supported risk appetite during the quarter. Most asset classes generated positive returns, led by high yield credit, equities, and unhedged emerging market bonds. The Federal Reserve (Fed) raised rates in March, a widely anticipated move that acknowledged the strengthening U.S. economy. Corporate profits improved and volatility remained very low. Commodity performance was mixed; metals rallied while oil prices dropped.
The U.S. high yield credit rally that began in 2016 continued into the first quarter, with spreads (the difference in yield between Treasury and non-Treasury securities of similar duration) reaching multi-year tights in early March. Though spreads widened somewhat during the last weeks of the quarter, the asset class handily outperformed Treasurys of similar duration (duration refers to a security’s price sensitivity to interest rate changes).
U.S. Treasury yields reached year-to-date highs ahead of the Federal Reserve (Fed) interest rate hike, then retreated to finish the quarter essentially flat. The yield curve (a curve that shows the relationship between bond yields across the maturity spectrum) flattened as shorter-maturity Treasury yields rose while longer-maturity Treasury yields were nearly unchanged.
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