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Global Fixed Income Bulletin
May 15, 2020

The Long and Winding Road

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May 15, 2020

The Long and Winding Road

Global Fixed Income Bulletin

The Long and Winding Road

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May 15, 2020


The calamitous events of March quickly receded into memory as markets recovered dramatically in April. In fact, we had 18 months’ worth of bear/bull markets (credit and equities) compressed into those fateful weeks, beginning in mid-March. The S&P 500 was up 13%, its best month since January 1987, while the Bloomberg Barclays US Corporate Index returned 5.2%. We had some of the best days and weeks and some of the very worst all in March/April. Interest rate volatility collapsed and is now close to pre-crisis levels. Yet the world also experienced the worst economic data ever seen, at least over such a short period of time. Every data release in Europe and the U.S. was worse and worse, more often than not exceeding already depressed forecasts/expectations. Yet markets rallied.


Policies responded: monetary policy, fiscal policy and, just as importantly, health policy responded (or showed strong signs of working). On all three fronts, policy actions were unprecedented. The U.S. Federal Reserve (the Fed) added over $3 trillion to its balance sheet in a matter of weeks. The U.S. Congress passed unprecedentedly large fiscal support packages designed for direct income support and credit support for the corporate sector, partnering with the Fed and banking sector to distribute trillions of dollars of support. In fact, estimates have been made that, as a result of all the policy actions in the U.S., national income (as defined in GDP accounts) will actually be up this year. As with any war -- and this is a war with a virus -- overwhelming firepower frequently wins the day. And, so far policymakers seem to be winning.

Our commentary title last month, “The End of the Beginning,” seems very appropriate. The economic policy war has been won, in that enough support and confidence has been injected into the economy at large to give health policy a chance to slow infection rates to low enough levels to reopen economies. The good news is that this is happening and will likely support asset prices. The bad or uncomfortable news is that we do not know if it will work in North America, Europe and in many emerging countries. First-in-first-out China may provide some clues as to what to expect in terms of recovery patterns. So far the evidence points to sluggish (though potentially bottoming) behavior in the services sector (amid soft consumption), and a more convincing rebound in manufacturing, recently tempered by weak export data (due to falling external demand). The potential for a second wave of infections could also jeopardize a more decisive recovery in economic activity and needs to be monitored. Given all the imponderables surrounding the near future, but taking into account the progress made, cautious optimism is warranted. While we may indeed be on a “long and winding road” the longer your investment horizon, we believe the more confident you should be.

Display 1: Asset Performance Year-to-Date

Note: USD-based performance. Source: Bloomberg. Data as of April 30, 2020. The indexes are provided for illustrative purposes only and are not meant to depict the performance of a specific investment. Past performance is no guarantee of future results. See below for index definitions.

Display 2: Currency Monthly Changes Versus USD

Source: Bloomberg. Data as of April 30, 2020. Note: Positive change means appreciation of the currency against the USD.

Display 3: Major Monthly Changes in 10-Year Yields and Spreads

Source: Bloomberg, JP Morgan. Data as of April 30, 2020.


Fixed Income Outlook

After the roller coaster and depressing series of events in March, April was a welcome relief. Policy actions were of unprecedented size and structure, showing a degree of coordination (if indirect) of monetary and fiscal policy not seen since the 1940s, helping money markets, government bonds and credit markets to stabilize. Risky assets rebounded and, importantly, government bond yields fell. A synchronized collapse in global economic activity corresponded with a synchronized policy response with implicit messages: “we will do whatever it takes” and “failure is not an option,” wartime slogans appropriate for today’s COVID-19 war.

As the news flow improved, we could characterize unprecedented weakness in economic data and negative oil prices as positive, in the perverse sense that what is at zero can only go up. The combination of massive policy actions on monetary/fiscal/health fronts with the sense -- and it is only a hunch -- that economic activity is reaching a bottom in April/May is leading to better asset market performance. We believe that government bond yields (in general, maybe not for every country) in developed markets, equities and oil bottomed in March/April, and employment will bottom in May. But, where do we go from here after the strong April rallies?

We expect QE to continue in an unlimited way in the coming months across developed markets, even if at a reduced pace given the frenetic interventions in March and April. It is still too soon to be able to tell the ultimate impact that the coronavirus will have on the economy and global markets. Will reopenings cause a second wave of infections? Will travel and leisure activities return to “normal”? What shape or contour will the economic recovery have? V shaped? Not likely, unless there is a miracle healthcare development, given the severe disruptions to the global economy and persistent impact on consumer behavior. Will it be a checkmark recovery, with rebound not as sharp as downturn? Or could it be an L, or a W? We do not know. We do believe risk-free government bond yields will remain low, an unlikely source of return going forward, and that inflation will not be an issue. Because of this, we believe central banks will continue to be accommodative indefinitely, or even expand stimulus to new heights.

A consolidation of the improved risk sentiment observed during April may benefit risky assets. For instance, while the economic and health outlooks look a lot better now, and volatility has retreated, government bond prices and investment grade spreads generally reflect that; that is, a short, sharp recession but no depression. In order to see further compression of corporate bond spreads, whether investment grade or high yield, the economy will need to emerge from lockdown in an orderly fashion. Government support of incomes at their recent pace is probably unsustainable past the summer. The Fed’s TALF program is expected to terminate at the end of September, for example. This of course does not mean programs and support cannot be renewed or expanded, it is just that the medium term cost in terms of debt, lost productivity, lost income and lower future living standards (hopefully only relative to previous expectations) are potentially very high. Therefore, while spreads are still wide of pre-crisis levels, a relatively large amount of near-term optimism is discounted. 

Two sectors underperformed in the April rebound. Emerging Market (EM) debt and securitized credit. The simple reason is that neither benefitted directly from all of the monetary and fiscal support policies announced and implemented in March and April. Therefore, attractive valuations, stabilization in commodity prices, and progress on funding/debt relief initiatives directly targeting EM economies could combine to provide a boost to EM debt in the near term.

Securitized credit also failed to rebound as much as developed market credit (or agency mortgage backed securities) for the same reason as EM. For this reason we believe there is more room for securitized credit to catch up to corporate credit in the months ahead as there is more room for spreads to compress as economies come off the floor, so to speak. New issuance remains very light and secondary selling has slowed substantially, while demand appears to be steadily increasing. Spreads are unlikely to quickly return to pre-COVID-19 levels (but neither are credit spreads in general) given the elevated economic risks from the virus, but we expect spreads to continue to tighten in from current levels. 

While we remain optimistic that the worst is over, so do financial markets, meaning that a second wave of infections requiring a second wave of lockdowns could be deleterious to risky assets. China did not relax its lockdown until it had essentially defeated the virus, and even now social distancing measures and travel restrictions remain in place. Europe and the U.S. are attempting to relax lockdowns while still trying to reduce infections, a much harder battle. Sweden is conducting an experiment of not locking down the economy and absorbing the infection costs with only a focus on social distancing. Is this a harbinger that unlocking economies before the virus is well under control is possible? As every country has its own social norms and is experiencing different infection and mortality rates, we must be careful about generalizing the experience(s) of one country to others. We will know more over time and our investment strategy will adjust to changing facts and valuations.

Developed Markets

Monthly Review

In April, market conditions seemingly began to revert to more “normal” levels as massive government stimulus measures began to work across the developed markets, mainly in the United States. The VIX fell by 19 percentage points after reaching as high as 83 in March.1 Over the month, changes in developed market government 10-year bond yields were mixed. Central bank action remained the driver, with yields falling more where central bank easing was more aggressive and not doing as well where they were less aggressive.


Overall, we expect continued monetary policy accommodation across developed markets in the coming months. Having eased aggressively in March and seen market conditions stabilize, it is understandable that most central banks waited to see if further accommodative measures are necessary. This will depend on market conditions and developments in the underlying economy. But, with (upward) inflationary pressures very weak and economies hit by a severe exogenous shock, there is every reason to believe central banks will be ready to ease further, although most will have to do so via unconventional policy measures (e.g. QE and liquidity provision measures) given policy rates in most DM economies are already at the lower bound.

Emerging Markets

Monthly Review

EM assets rallied in April as the impact of monetary and fiscal stimulus from global authorities worked its way through financial markets. EM dollar-denominated corporates led the way in performance, driven by the high yield segment, as well the industrial, consumer, and metals and mining sectors. Domestic debt followed corporates as local bonds rallied and EM currencies strengthened versus the U.S. dollar. Dollar-denominated sovereigns brought up the rear as Latin American countries lagged.2


Following the incipient stabilization observed in April, market attention will focus on the gradual easing of lockdown measures in the developed world. First-in-first-out China may provide some clues as to what to expect in terms of recovery patterns: so far the evidence points to sluggish (though potentially bottoming) behavior in the services sector and a more convincing rebound in manufacturing, recently tempered by weak export data. The potential for a second wave of infections could also jeopardize a more decisive recovery in economic activity and needs to be monitored.


Monthly Review

The key driver of credit spreads in April was a more optimistic expectation for markets as the coronavirus debate moved to strategies to exit the lockdown and the policy response intensified with additional liquidity support for corporates and fiscal grants for labor furloughed as a result of the “shuttering.” The month can be broadly split into two stages, an initial rally from the wide spreads of March, followed by a consolidation toward month-end when spreads rebounded to levels seen in February 2016, when oil was last below $30 per barrel and the base case expectation was for a demand driven recession.3


We frame the outlook for credit a simple question: Is now the time to buy? Fundamentals have consolidated, with the optimists citing advances in the path to a vaccine and plans to exit lockdown with the economy supported by the level of policy stimulus/support, while pessimists focus on the risk of reinfection and the economic cost seen in the current weak economic data. Valuations seem to be fair for the current backdrop.

Securitized Products

Monthly Review

The securitized market partially rebounded in April, with spreads tightening to varying degrees, although remaining materially wider across all sectors than pre-COVID-19 levels. There was a clear tiering of recovery, with higher-quality assets and securities receiving support from the Fed and recovering most significantly, while more credit-sensitive securities languished. Fundamental credit conditions remain challenged, with U.S. jobless claims over the last six weeks totaling over 30 million.4


We expect to see spreads continue to tighten across most securitized sectors in May. New issuance remains very light and secondary selling has slowed substantially, while demand appears to be steadily increasing. Spreads are unlikely to return to pre-COVID-19 levels given the elevated economic risks from the virus, but we expect spreads to continue to tighten in from current levels. We believe the current market environment represents an attractive investment opportunity, as we believe that current spreads overcompensate for actual credit risks.


1 Source: Bloomberg, as of 4/30/2020

2 Source: JP Morgan, as of 4/30/2020

3 Source: Bloomberg, as of 4/30/2020

4 Source: Bloomberg, as of 4/30/2020



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 that the value of portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in a portfolio.  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. 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. Public bank loans are subject to liquidity risk and the credit risks of lower-rated securities. High-yield securities (junk bonds) are lower-rated securities that may have a higher degree of credit and liquidity risk. Sovereign debt securities are subject to default risk. 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. The currency market is highly volatile. Prices in these markets are influenced by, among other things, changing supply and demand for a particular currency; trade; fiscal, money and domestic or foreign exchange control programs and policies; and changes in domestic and foreign interest rates. Investments in foreign markets entail special risks such as currency, political, economic and market risks. The risks of investing in emerging market countries are greater than the risks generally associated with foreign investments. 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). Due to the possibility that prepayments will alter the cash flows on collateralized mortgage obligations (CMOs), it is not possible to determine in advance their final maturity date or average life. In addition, if the collateral securing the CMOs or any third-party guarantees are insufficient to make payments, the portfolio could sustain a loss.

The Global Fixed Income team follows a seamless process with a global outlook. They seek to identify and capture the potential value in situations where the market's implied forecasts are extreme.


R* is the real short term interest rate that would occur when the economy is at equilibrium, meaning that unemployment is at the neutral rate and inflation is at the target rate.


The indexes shown in this report are not meant to depict the performance of any specific investment, and the indexes shown do not include any expenses, fees or sales charges, which would lower performance. The indexes shown are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

The Bloomberg Barclays Euro Aggregate Corporate Index (Bloomberg Barclays Euro IG Corporate) is an index designed to reflect the performance of the euro-denominated investment-grade corporate bond market.

The Bloomberg Barclays Global Aggregate Corporate Index is the corporate component of the Barclays Global Aggregate index, which provides a broad-based measure of the global investment-grade fixed income markets.

The Bloomberg Barclays U.S. Corporate Index (Bloomberg Barclays U.S. IG Corp) is a broad-based benchmark that measures the investment-grade, fixed-rate, taxable corporate bond market.

The Bloomberg Barclays U.S. Corporate High Yield Index measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. The index excludes emerging market debt.

The Bloomberg Barclays U.S. Mortgage Backed Securities (MBS) Index tracks agency mortgage-backed pass-through securities (both fixed-rate and hybrid ARM) guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA) and Freddie Mac (FHLMC). The index is constructed by grouping individual TBA-deliverable MBS pools into aggregates or generics based on program, coupon and vintage. Introduced in 1985, the GNMA, FHLMC and FNMA fixed-rate indexes for 30- and 15-year securities were backdated to January 1976, May 1977 and November 1982, respectively. In April 2007, agency hybrid adjustable-rate mortgage (ARM) pass-through securities were added to the index.

Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care.

Euro vs. USD—Euro total return versus U.S. dollar.

German 10YR bonds—Germany Benchmark 10-Year Datastream Government Index; Japan 10YR government bonds —Japan Benchmark 10-Year Datastream Government Index; and 10YR U.S. Treasury—U.S. Benchmark 10-Year Datastream Government Index.

The ICE BofAML European Currency High-Yield Constrained Index (ICE BofAML Euro HY constrained) is designed to track the performance of euro- and British pound sterling-denominated below investment-grade corporate debt publicly issued in the eurobond, sterling

The ICE BofAML U.S. Mortgage-Backed Securities (ICE BofAML U.S. Mortgage Master) Index tracks the performance of U.S. dollar-denominated, fixed-rate and hybrid residential mortgage pass-through securities publicly issued by U.S. agencies in the U.S. domestic market.

The ICE BofAML U.S. High Yield Master II Constrained Index (ICE BofAML U.S. High Yield) is a market value-weighted index of all domestic and Yankee high-yield bonds, including deferred-interest bonds and payment-in-kind securities. Its securities have maturities of one year or more and a credit rating lower than BBB-/Baa3, but are not in default.

The ISM Manufacturing Index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

Italy 10-Year Government Bonds—Italy Benchmark 10-Year Datastream Government Index.

The JP Morgan CEMBI Broad Diversified Index is a global, liquid corporate emerging markets benchmark that tracks U.S.-denominated corporate bonds issued by emerging markets entities.

The JPMorgan Government Bond Index—Emerging markets (JPM local EM debt) tracks local currency bonds issued by emerging market governments. The index is positioned as the investable benchmark that includes only those countries that are accessible by most of the international investor base (excludes China and India as of September 2013).

The JPMorgan Government Bond Index Emerging Markets (JPM External EM Debt) tracks local currency bonds issued by emerging market governments. The index is positioned as the investable benchmark that includes only those countries that are accessible by most of the international investor base (excludes China and India as of September 2013).

The JP Morgan Emerging Markets Bond Index Global (EMBI Global) tracks total returns for traded external debt instruments in the emerging markets and is an expanded version of the EMBI+. As with the EMBI+, the EMBI Global includes U.S. dollar-denominated Brady bonds, loans and eurobonds with an outstanding face value of at least $500 million.

The JP Morgan GBI-EM Global Diversified Index is a market-capitalization weighted, liquid global benchmark for U.S.-dollar corporate emerging market bonds representing Asia, Latin America, Europe and the Middle East/Africa.

JPY vs. USD—Japanese yen total return versus U.S. dollar.

The National Association of Realtors Home Affordability Index compares the median income to the cost of the median home.

The Nikkei 225 Index (Japan Nikkei 225) is a price-weighted index of Japan’s top 225 blue-chip companies on the Tokyo Stock Exchange.

The MSCI AC Asia ex-Japan Index (MSCI Asia ex-Japan) captures large- and mid-cap representation across two of three developed markets countries (excluding Japan) and eight emerging markets countries in Asia.

The MSCI All Country World Index (ACWI, MSCI global equities) is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed and emerging markets. The term "free float" represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends.

MSCI Emerging Markets Index (MSCI emerging equities) captures large- and mid-cap representation across 23 emerging markets (EM) countries.

The MSCI World Index (MSCI developed equities) captures large and mid-cap representation across 23 developed market (DM) countries.

Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector.

The S&P 500® Index (U.S. S&P 500) measures the performance of the large-cap segment of the U.S. equities market, covering approximately 75 percent of the U.S. equities market. The index includes 500 leading companies in leading industries of the U.S. economy.

The S&P/LSTA U.S. Leveraged Loan 100 Index (S&P/LSTA Leveraged Loan Index) is designed to reflect the performance of the largest facilities in the leveraged loan market.

The S&P GSCI Copper Index (Copper), a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark for investment performance in the copper commodity market.

The S&P GSCI Softs (GSCI soft commodities) Index is a sub-index of the S&P GSCI that measures the performance of only the soft commodities, weighted on a world production basis. In 2012, the S&P GSCI Softs Index included the following commodities: coffee, sugar, cocoa and cotton.

Spain 10-Year Government Bonds—Spain Benchmark 10-Year Datastream Government Index.

The Thomson Reuters Convertible Global Focus USD Hedged Index is a market weighted index with a minimum size for inclusion of $500 million (U.S.), 200 million euro (Europe), 22 billion yen, and $275 million (Other) of convertible bonds with an equity link.

U.K. 10YR government bonds—U.K. Benchmark 10-Year Datastream Government Index. For the following Datastream government bond indexes, benchmark indexes are based on single bonds. The bond chosen for each series is the most representative bond available for the given maturity band at each point in time. Benchmarks are selected according to the accepted conventions within each market. Generally, the benchmark bond is the latest issue within the given maturity band; consideration is also given to yield, liquidity, issue size and coupon.

The U.S. Dollar Index (DXY) is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners’ currencies.

The Chicago Board Options Exchange (CBOE) Market Volatility (VIX) Index shows the market’s expectation of 30-day volatility.


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