U.S. Fixed Income

August 2020 Fixed Income Market Update

In our view, monetary and fiscal policy have done a tremendous job in papering over fundamental uncertainty.
August 2020

News & nuggets

  • The Eurozone launched a €750 billion recovery fund to combat economic impacts of the coronavirus. Beyond the sheer size of the package, the deal was significant as it entails joint borrowing by European countries, which had not been undertaken heretofore.
  • In the U.S., the enhanced unemployment benefits of an additional $600 a week ended on July 31st. Another round of fiscal stimulus is expected in the U.S., but Democrats and Republicans have been unable to agree on the terms to date. The expiration of the program impacts up to 30 million unemployed individuals and is likely to impact consumer confidence and spending.
  • While initial jobless claims have come down significantly from the peak earlier this year, continuing jobless claims remain high and concerning.
  • The Federal Open Market Committee met on July 30-31, making no changes to policy and restating their intent to provide extraordinary support to the economy. In their statement, the Fed explicitly acknowledged that “the path of the economy will depend significantly on the course of the virus.” Minutes released in July from the June 9-10th meeting showed an extensive discussion around yield curve control.
  • With about 2/3 of earnings reported, earnings are tracking at a 35.7% decline year over year according to FactSet. This earnings season is on pace to be the worst since the fourth quarter of 2008. However, given the reduced expectations, it is also on pace for the highest rate of expectations beats since FactSet began tracking that data in 2008. Estimates are for a 19.4% decline in earnings for calendar year 2020 with revenues falling 3.2% and a rebound in earnings of 27.0% in 2021 with revenues rising by 8.4%.

Outlook and conclusions

  • In our view, monetary and fiscal policy have done a tremendous job in papering over fundamental uncertainty. Perhaps too good a job. Corporate profits and economic growth beat expectations, though the bar was extraordinarily low and absolute levels dreadful. There is reasonable optimism that we have seen the worst, however, having passed the bottom is not the same as a clear horizon going forward. Increased coronavirus cases and weak employment data pose serious challenges. These realities are coupled with the need for fiscal policy support in an election year. As the month ended, an extension of fiscal policy remained an open question. Yet, markets and risk sentiment marched on. Equities advanced into positive territory for the year and credit spreads continued to tighten, though they remain wide to their starting points for the year. Spreads remaining wide to both the starting point of the year as well as historical averages suggest some potential for additional tightening, however, given the magnitude of challenges and uncertainty, the positive skew of outcomes we observed in recent months has softened. This leads us to more neutral positioning, though at the same time recognizing the robust demand likely to persist for U.S. fixed income in a yield starved world.

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Disclosures

This is not intended to serve as a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. Information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. This publication is prepared for general information only. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investment involves risk. Market conditions and trends will fluctuate. The value of an investment as well as income associated with investments may rise or fall. Accordingly, investors may receive back less than originally invested. Investments cannot be made in an index. Past performance is not necessarily a guide to future performance.

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