Market Pulse
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aprile 02, 2020
Fixed Income Market Update
 

Market Pulse

Fixed Income Market Update

Fixed Income Market Update

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aprile 02, 2020

 
 

The following update was presented by Michael Kushma, Chief Investment Officer of Global Fixed Income, Richard Ford, Global Head of Credit and Richard Class, Head of Product Development for EMEA and European Multi-Sector Strategies, Portfolio Manager on 2 April 2020.

Key Points

  • The markets have continued to heal over the last week, with additional policy support. However, we are not at the end of the crisis and the news flow in April will show further deterioration before any improvement, on both the health and economic front. For example, US weekly initial unemployment claims were over 6 million today. The pre-crisis level was around 200,000.
  • The Federal Reserve has announced two new programmes in the last week. The first allows foreign entities to do repo agreements with the Fed, obviating the need to sell bonds to raise cash. This has helped to stem the selling of short-dated bonds and reduced cross currency hedging costs. Secondly, banks in the US no longer have to hold reserves against their holdings of Treasuries and against their Fed balances. This will allow them to expand their balance sheets.
  • The improved liquidity in the markets has allowed a record USD272bn of investment grade new issuance to be raised in the US in March.
  • High yield was down as much as 20%, is now down 13%.
  • Have we seen the widest levels of spreads? Possibly, but this depends on the evolution of the pandemic and whether there will be more selling if prices recover, prompting a further sell-off.
  • Given that all assets have cheapened, there are opportunities for clients to add risk. The best solution for each client will depend on the degree of default, price volatility and liquidity risk they are prepared to take.
  • Credit returns were strong in 2009 and 2012, after the travails of the previous years. Given the widening of spreads in March, we could see a repeat (no guarantee), and we have the expertise to build customised solutions for clients.
 
 

 

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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).

The Bloomberg Barclays Global High Yield – Corporate Index: is a multi-currency measure of the global high yield corporate debt market. The benchmark name changed from Barclays Global High Yield – Corporate Index to Bloomberg Barclays Global High Yield – Corporate Index on August 24, 2016.

The source for all data is Morgan Stanley Investment Management Limited.

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

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