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Global Fixed Income Bulletin
April 16, 2020

The End of the Beginning

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April 16, 2020

The End of the Beginning

Global Fixed Income Bulletin

The End of the Beginning

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April 16, 2020


As every person on the planet knows, March was a watershed month. The COVID-19 epidemic turned into a global pandemic, engulfing the rest of the world, leading to rapidly rising deaths and infections, lockdowns of populations and the closing of economies. Economic data is setting records for the most precipitous collapse on record. Unemployment is soaring, and GDP is likely to fall at a double-digit annualized rate in Q2. We are in unprecedented territory, and March financial market performance reflected this. Volatility soared; yields went down; then up; then down again. Equities also experienced similar patterns, but with a more obviously downward trajectory. By the end of March, we had had both a bear market and bull market in the same month!


As March came to a close, bond markets across the world were “infected” and performed very poorly. Normally one expects bond yields of both high-quality government bonds and investment-grade corporate bonds to fall when economic data weakens. And yet, only U.S. Treasury yields managed to fall (and only by a small amount) over the course of the month. Investment grade corporate bonds, at one point, had a double-digit negative return. The global financial system experienced panic unlike anything seen since 2008 (if not worse this time around). But, instead of a run on banks, we had a run on stocks, bonds, and money market funds. There was a global rush to USD cash, resulting in position unwinds, forced selling, and funding stresses of unprecedented size.

The good news is that policymakers had a playbook based on lessons learned from 2008. The world’s central banks and governments dusted it off and went to work. The Fed cut rates to the lower bound and injected well over a trillion dollars of cash into the system, and pledged unlimited QE, a “whatever it takes” attitude. A new alphabet of programs were launched to stabilize financial markets, improve liquidity, and ensure flow of credit to the economy. Other central banks joined the Fed and launched significant QE programs after cutting rates to zero bound in record time. In most cases central bank purchases will cover all the financing needs of the government. The Australian central bank (RBA) also implemented a form of yield curve control (YCC). The European Central Bank (ECB) enhanced their toolkit by establishing a new program titled the Pandemic Emergency Purchase Programme (PEPP), which allows them to invest over one trillion in government bonds, in addition to the existing QE programs and with more flexibility.

Moreover, the U.S. Congress passed landmark legislation earmarking over $2 trillion to support the economy during its closure. As a result of the Fed’s and the rest of the world’s actions, markets and confidence are improving. Equity and credit markets rallied significantly the last week of March, and government bond yields moved down, in line with economic logic. It remains unknown how deep and protracted the economic downturn (recession) will be. We are hopeful that existing policy actions, and future policy actions (if current actions do not prove to be sufficient), will put a floor under the economy and allow things to gradually return to normal as the health crisis recedes. In the interim we are hostage to the path of the virus. We believe we are at the end of the beginning.

Display 1: Asset Performance Year-to-Date

Note: USD-based performance. Source: Bloomberg. Data as of March 31, 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 March 31, 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 March 31, 2020.


Fixed Income Outlook

March was another schizophrenic month of extreme volatility, with yields and spreads moving up and down like yo-yos. There were three distinct regimes: The beginning of the month to March 6 was what one could call a normal bear market; March 6 to March 19 (marking the high in IG yield spreads) was more of a global panic; and then March 19th to end of the month we would call a relief rally. Of course, things were worse by the end. The first week of the month was a continuation of February. Bad news arrived but was largely in line with expectations. Equities weaker; credit spreads modestly wider, government yields, importantly, lower. 10-year U.S. Treasury yields fell over 50 basis points (bps) while U.S. IG yields were mostly unchanged. However, the explosion of infections in Europe and impending lockdowns in the United States over the weekend of March 7, along with the announcement that OPEC+ was about to start a price war instead of cutting output, sent markets reeling. There was a surge in demand for liquidity, USD cash in particular, and many investors had to sell whatever they could to get it. Money markets reeled, and foreign exchange and government bond markets behaved erratically due to investors’ pressing need to generate cash and limited liquidity for market counterparties. Equities collapsed and credit spreads (and yields) soared. The pace with which risky assets sold off into bear market territory (i.e., a decline of 20% or more) was the fastest on record.

In many ways this was a classic liquidity squeeze. The world wanted U.S. dollar cash; nothing but USD cash would do. This elicited an unprecedented response by monetary authorities worldwide. Rates were cut to the effective lower bound (if they were not there already) and trillions of dollars were injected into money markets and bond markets. New programs were begun with a whole new set of acronyms (TALF, MMCP, CPFF). These helped significantly to calm markets, particularly in government bond markets where yields, unusually, rose, as the demand for cash liquidity overwhelmed the more normal safe haven bid for (default risk-free) duration assets. By March 19, U.S. Treasury and other global government bond yields began to fall, as markets started to normalize, signaling success for the Fed’s first objective: stabilizing money markets and lowering the risk-free interest rate. Importantly, the rapid fall in U.S. Treasury yields allowed IG yields to fall as well, lowering funding costs for the embattled private sector. The U.S. fiscal stabilization program, embodied in the CARES Act, although not yet implemented, is the missing link in providing support for household and business income while we wait for the infection rate to abate and the economy to reopen.

Unfortunately, stabilization does not mean recovery. The world economy is experiencing a slowdown of a pace that is unprecedented in modern times, as governments globally have ordered businesses to shut and people to stay at home. How long the shutdowns will last is unclear, with only some Asian economies moving tentatively to normalize economic activity. Macroeconomic data is likely to be awful in April, but we think this may trouble markets less than usual, as, first the dramatic slowdown is already expected and, second, the data will tell us little about how economic growth will evolve going forward, as this depends more on the COVID-19 epidemic and how quickly governments can re-open the economy. We believe any sign that the economy/cash flow/earnings are doing better than expected will lead to better performance of risky assets. The economy was in reasonably good shape before the COVID-19 outbreak, so economic activity could normalize quite quickly, assuming containment and social isolation measures can be lifted rapidly without the threat of secondary waves of infection. The good news is that the policy response is really big.

In the interim, a lot of unknowns remain, which make us cautious. Can economies simply be reopened, like turning on a light switch? Will there be lasting damage? Will unemployment come down quickly? Which industries will survive intact?  Will travel and leisure industries ever be the same? So many questions, so few answers.

Given these questions, this is what we think is an appropriate investment strategy. Government bond yields are now at unprecedentedly low levels, and at record rich levels on some valuation measures. But it is not obvious that they will rise anytime soon, even with unprecedented deficits in the U.S. and the rest of the world. There is still scope for them to fall further if the economy deteriorates, which is not hard to imagine given the uncertainty around the virus shock. Central banks will use their balance sheets to provide “infinite” QE, meaning they will do whatever is necessary to make sure credit flows to all solvent companies/industries. Fiscal agents will help support incomes and employment where possible to prevent aggregate demand from collapsing now and when the pandemic is over. This implies one should focus investments, for now, on those companies/assets that can benefit directly from government help. Government bonds, investment grade credit, agency mortgage-backed securities should all be direct beneficiaries. Of these, only investment-grade credit looks fundamentally cheap, offering potential higher returns to patient, long-term investors. High yield also presents good opportunities for those willing to assume greater risks. While this crisis is in many ways different from previous periods, high yield has proven itself to be resilient and has provided strong total returns following periods of extreme spread widening. While defaults are likely to rise sharply in certain high yield sectors, we believe the widening of high yield spreads to date mean this is already in the price. Sector and company differentiation will also be crucial, as some sectors are worse affected than others, and not all businesses will be bailed out by governments. Identifying quality management teams and business model flexibility will be key to generating investment returns.  

Securitized credit is an area that performed particularly poorly in March, especially given the perception of it as a relatively low risk asset. We believe this is because of forced liquidations and loss of financing that led to distressed selling. Much of the cheapening was not because of deterioration in structure or asset performance, although a prolonged economic shutdown will obviously impair asset quality. We thus expect spreads across most securitized sectors to bounce back in April, although they may remain materially wider than pre-coronavirus levels, given the elevated economic risks from the virus. We believe the current market environment may represent a great entry point for new investors and an opportunity for recovery for current investors.

Many emerging countries are in the same position, where a general retreat from the asset class has led to forced selling and asset price declines that do not necessarily match changes in fundamentals. Governance, balance sheet strength, and economic growth will be key in identifying those countries which will perform well in the months ahead.

Developed Markets

Monthly Review

March was an extraordinary month for DM rates and FX markets, as corona virus concerns caused risky assets to plummet, all assets to struggle from the subsequent volatility and liquidity shock, before central banks and governments intervened aggressively to a more orderly footing. In the U.S., the Federal Reserve (Fed) announced several significant policy responses: It slashed the Federal Funds rate to a range of 0.0% to 0.25% and the discount window borrowing rate was lowered to 0.25%; it “encouraged” banks to use the discount window as a source of funding to meet client needs, which removed the stigma of using it as a source of funding.


The global outlook is contingent on the coronavirus’ path and pace at which it spreads in the coming weeks and is key in determining its global impact, both in the short- and long-run. However, given the downside risks, central banks are likely to remain accommodative for an extended period. A key differentiator for asset performance going forward is likely to be how well the pandemic has been handled, with more successful economies likely to see their asset prices benefit.

Emerging Markets

Monthly Review

Extraordinary times were matched by extraordinary price action across markets, and movements in EM debt were no exception as risk markets registered new historic lows in March. The combination of the global slowdown, resulting from fighting COVID-19, and the drop in oil prices, related to both demand destruction and the ongoing friction between Saudi Arabia and Russia, has been challenging to say the least.


While we do not know when this will end, we can say that the numerous monetary and fiscal policies being put into effect by governments and central banks around the world are having a stabilizing effect. The illiquidity the stress generated cuts both ways, and we have seen dramatic and quick recoveries in many assets when risk sentiment turned positive (albeit assets are still lower than at the beginning of the month). Within EM, we believe some countries are positioned to withstand the current economic pressures while others are far more vulnerable. The changes to the global supply chain that were prompted by the recent trade wars will only be accelerated in the post-virus market as countries look to build their health and medical defenses.


Monthly Review

March saw corporate spreads widen in the U.S. and in Europe. The key drivers of credit spreads in March were the uncertainty created by the coronavirus and the level of credit selling. Other factors that caused volatility include a breakdown of the OPEC discussions about managing supply, central banks’ responses to the crisis including provisions of liquidity and programs to buy corporate bonds, large supply as weakness in short term funding markets pushed high quality issuers to the public corporate market and rating action, particularly in sectors directly impacted by the weak economic activity.


The economy (and asset prices) have been hit by the containment measures necessary to halt the spread of the coronavirus and the related fall in oil prices following the breakdown of OPEC discussions. Markets are looking for clarity over (1) the length of time isolation policies will remain in force and (2) the time it will take to identify a vaccine. Hopes of a V-shaped rebound are no longer the base case as questions over the assumption that warm weather will reduce the impact of the virus and health experts warning that a vaccine is months and not weeks away are re-pricing markets. The reality is a base case no longer exists with the limited credible data.

Securitized Products

Monthly Review

The positive fundamental credit environment in both the U.S. and Europe quickly turned negative as large segments of the economy shut down, and the backdrop of low unemployment quickly changed with a surge of service-sector layoffs. Governments and central banks have responded swiftly with unprecedented stimulus, including massive Central bank purchases and direct cash payments to tax-payers, as well as support for small businesses and industries particularly affected by the coronavirus. These measures should help cushion the impact from the pandemic, but the effects will still be significant and will vary across different sectors.


We expect spreads across most securitized sectors to bounce back in April. The distressed selling and forced liquidations that took place in March seem to have subsided, and new capital appears to be flowing into the market. Spreads will likely remain materially wider than pre-coronavirus levels, given the elevated economic risks from the virus, but should tighten in from current levels as some of the market overreaction and forced selling pressures dissipate. We believe the current market environment represents a great entry point for new investors and opportunity for recovery for current investors.



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.


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