Fans of the efficient market hypothesis (EFH) like to ridicule the old trading adage "sell in May and go away".

Seasonal effects would soon be ironed out by professional investors, according to EFH proponents, but equity markets had a fairly tough time over the month, with US stocks down by over 3% and the Dax off nearly 6%.

Government debt has performed even worse - US treasuries and Japanese government bonds both fell sharply during May. The two asset classes are not unrelated; rising Treasury yields can make equities less attractive. Perhaps the EFH believers should be less dogmatic?

However, if the saying does have some truth, the credit markets haven't listened this year. Bonds, in particular, have withstood the onslaught of volatility that has afflicted other asset classes. The asset swap margin of the Markit iBoxx € Corporates (3-5 year) index has fallen from 110bps to 96bps during May.

Given the aforementioned rising Treasury yields and talk of a great rotation into equities, this is an impressive performance.

CDS spreads, unfortunately, haven't held up quite as well. The Markit iTraxx Europe index closed at 102.5bps, about 3.5bps wider over May. Admittedly, this isn't a disaster, but CDS still compare unfavourably with their bond cousins. The CDS-bond basis has shifted in a positive direction as a result, both in Europe and North America. For more on this, see our latest CDS-bond report.

The monthly performance figures obscure the fact that it has been far from an easy time for credit. Panic hasn't set in amid headlines proclaiming bubbles and extreme volatility in other areas, but the last two weeks of the month saw considerable widening in CDS spreads.

It was hard to ignore the massive sell-off in the Nikkei, the volatility in JGBs and US Treasury yields rising sharply. Economic fundamentals remain very weak in Europe and there is precious little sign of growth on the horizon. CDS spreads are often more sensitive than corporate bonds in such circumstances and it was therefore no surprise to see them underperform.

Issuance remains strong and appetite for corporate debt remains healthy. However, street positioning probably played a big part in the bond outperformance and this will eventually contribute to a reversal.

Next week's US non-farm payrolls report, which is crucial to the Fed's thinking on QE, could be a catalyst for a change in spread direction.

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