Fixed Income Market Update
Fixed Income Market Update |
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The following update was presented by Michael Kushma, Chief Investment Officer of Global Fixed Income, and Katie Herr, Head of Fixed Income Product Strategy, on 9 April 2020.
Key Points
- This week was the first week in a while where there is good news to report on fixed income performance and (not unrelated) data on the virus. By and large markets are recovering from the big sell-off in the middle of March. The S&P 500 is up 23% from the low on 23 March 2020.
- Notably the investment grade corporate market has strongly come back, with the Bloomberg Barclays US Corporate index recouping 50% of the spread widening. Policymakers globally have focused on the government and investment grade corporate bond markets. The recovery in spreads suggests that the policy reactions are working.
- High yield markets have not kept pace, with the Bloomberg Barclays US HY Index returning only 9% in the same timeframe. One factor in this is that the credit mechanism is not yet fixed. Access to credit is harder to get, with most of it given to the higher quality entities.
- The difference between the policy response in 2008/2009 and now is magnitude and speed. In 2008 and 2009, policymakers needed to create new programs, and fight for their approval. This time policymakers have been able to dust off their old playbooks, and ask for bigger amounts. They are seemingly willing to do anything to make sure that when people can move away from social isolation, there is an economy to come back to. For example, the Fed recently stepped up again with the creation of the Paycheck Protection Program.
- More likely that the downturn in markets will be short-lived than there was the probability a couple weeks ago. Markets have shifted back to expecting a V-shaped recovery. This was the base case in February, but markets lost faith in a quick recovery in March. Economic data releases over the next couple of weeks will test confidence in the V-shaped recovery. We expect economic data in April to post the largest drop in history.
- Over the past week the MSIM Global Fixed Income team has added to investment grade corporate exposure. The team is also keeping dry powder on hand in order to take advantage of idiosyncratic market dislocations.
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).
Index Definitions
The Standard & Poor’s 500® Index (S&P 500®) measures the performance of the large cap segment of the U.S. equities market, covering approximately 80% of the U.S. equities market. The Index includes 500 leading companies in leading industries of the U.S. economy.
The Bloomberg Barclays U.S. Corporate Index is a broad-based benchmark that measures the investment grade, fixed-rate, taxable, corporate bond market. The benchmark name changed from Barclays U.S. Corporate Index to Bloomberg Barclays U.S. Corporate Index on 24th August 2016.
The Bloomberg Barclays U.S. Corporate High Yield Index: is a multi-currency measure of the global high yield corporate debt market. The benchmark name changed from Barclays US Corporate High Yield Index to Bloomberg Barclays US Corporate High Yield Index on 24th August 2016.
The index performance is provided for illustrative purposes only and is not meant to depict the performance of a specific investment. Past performance is no guarantee of future results.
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Chief Investment Officer of Global Fixed Income
Global Fixed Income Team
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