Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

After a scary start to the year, bond investors holding the riskiest debt will have been relieved to have ended April 5.3 percent ahead, according to the Barclays Global High-Yield Corporate unhedged dollar index -- marking the second month of a rally that began at the end of February, and the best return for April since 2009.

If history is any guide (and it shouldn't be, as every disclaimer says), returns were to be expected. Whether May will bring a similar result is a coin-toss. There's one certainty: more volatility. 

The last time global high-yield bonds ended the fourth month of the year negative was in 2005. It might have something to do with spring fever in the Northern hemisphere, but for some reason people like junk bonds in April, and 2016 was no different.

Over the same period, however, May has finished in the red as many times as it ended positive.

Here Today, Gone Tomorrow
In the past 10 years, April has always been good to junk bond investors. May has been fickle
Source: Barclays Indexes; Bloomberg
* Data refers to total return in the Barclays Global High Yield Corporate Index.

Perhaps that's a reflection of the old market adage, sell in May and go away. It hasn't always held true, but there are reasons to worry this year.

The first is Brexit. The U.K. referendum on whether to remain in the European Union is set for June 23. A poll held April 22-24 showed 46 percent of respondents in favor of leaving and only 44 percent planning to stay. Statistically, that leaves the outcome anyone's guess. Which reinforces the case to lighten up on risky positions, such as high-yield bonds, going into June. 

As with most things related to the EU, there's not much history to fall back on. But look what happened when there was a possibility that Greece, which has an economy equivalent to about 8 percent of the U.K., might drop the single currency. 

Now That's Volatility
The volatility of junk bonds has risen but it's nowhere near highs seen in 2011, amid threats of Grexit
Sources: Barclays Indexes; Bloomberg

Then there's the Fed. Chair Janet Yellen's lack of clear guidance on when benchmark rates in the U.S. will rise again, and her statement that the central bank is monitoring data, will make for jumpy conditions as traders watch every data point in the world's largest economy. 

And then China. The world's second-biggest economy seems to have its stock market and currency flows somewhat under control. But as soon as it plugs one gap, another one opens, and the excesses of commodity markets don't bode well. 

None of these things need spell disaster. Britain may stay in the EU, the Fed could hold rates until December, and Chinese regulators may pop another bubble without causing global panic. The reverse case is also plausible.

In risky markets such as high-yield bonds, uncertainty isn't welcome. It's usually a reason for investors to reduce their positions, pushing down prices and returns, or at least to hedge them, which tends to have a similar effect. So celebrate the April rally, but beware May.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net