Market Pulse
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March 27, 2020
Fixed Income Market Update
 

Market Pulse

Fixed Income Market Update

Fixed Income Market Update

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March 27, 2020

 
 

Michael Kushma, Chief Investment Officer of Global Fixed Income, and Richard Class, Head of Product Development for EMEA and European Multi-Sector Strategies, Portfolio Manager, presented an update on the Fixed Income Market on 26 March 2020.

Key Points

  • There have been significant improvements in the nature of the response from central banks and governments over the last week.
  • In the US, the Senate has passed a USD 2 trillion spending bill which should be ratified by the House and the President very quickly. The Federal Reserve is buying between 50bn and 70bn of US Treasuries each day. The money markets and government bond markets are functioning much better, a necessary but not sufficient condition for other fixed income markets to recover.
  • In another sign of lower stress, the cross currency hedging costs have declined from around 2% to 1.25% (3 month annualised cost).
  • In Europe, the ECB has started to buy bonds today and has relaxed its capital key restrictions. This should aid peripheral countries.
  • We have seen the US and European IG credit markets reopen (but not yet in GBP). High quality issuers have borrowed money at significant discounts and seen strong demand from investors. This is important as it demonstrates where the markets can clear bonds. We have been active in these new issues.
  • Higher risk areas of the markets such as EM and HY are still stabilising. Selling appears to have been exhausted for now, but although prices have recovered somewhat, the markets remain stressed.
  • Securitised is still de-levering on forced liquidations.
  • In 2008/9 the order of recovery of markets was IG, then HY, then Equities.
  • Although we are more optimistic today, this is by no means the end of the crisis. The market is assuming this is a one quarter hit of large magnitude, based on what is happening in China. There are three risks here. First, will China be able to move towards normality without a resurgence of the virus? Secondly, how long will it take for cases to peak in the US and Europe? Finally, how soon will we be able to relax our restrictions?
 
 

 

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michael.kushma
Chief Investment Officer of Global Fixed Income
Global Fixed Income Team
 
richard.class
Managing Director
Global Fixed Income Team
 
 
 
 

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