Fixed Income Market Update
Fixed Income Market Update |
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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?
RISK CONSIDERATIONS
There is no assurance that a Portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the Portfolio will decline and may therefore be less than what you paid for them. Accordingly, you can lose money investing in this Portfolio. Please be aware that this Portfolio may be subject to certain additional risks. Fixed income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes. Mortgage- and asset-backed securities are sensitive to early prepayment risk and a higher risk of default, and may be hard to value and difficult to sell (liquidity risk). They are also subject to credit, market and interest rate risks. Certain U.S. government securities purchased by the Strategy, such as those issued by Fannie Mae and Freddie Mac, are not backed by the full faith and credit of the U.S. It is possible that these issuers will not have the funds to meet their payment obligations in the future. High-yield securities (“junk bonds”) are lower-rated securities that may have a higher degree of credit and liquidity risk. Public bank loans are subject to liquidity risk and the credit risks of lower-rated securities. Foreign securities are subject to currency, political, economic and market risks. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed countries. Sovereign debt securities are subject to default risk. Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. Restricted and illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk).
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Chief Investment Officer of Global Fixed Income
Global Fixed Income Team
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Managing Director
Global Fixed Income Team
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