In our view, the magnitude and speed of the market recovery in the second quarter are noteworthy and potentially cautionary. Government programs have done a better than expected job in replacing individual income to date, though some programs are expected to expire in the next month, which could create challenges. The Fed and other central banks have provided extraordinary policy support – primarily in the speed and sheer size of programs, but also in the frequent tweaks to programs intended to highlight that support as risk-off sentiment appeared it might creep back into markets. The hope remains that the policies put in place, both fiscal and monetary, can bridge the gap until the economy is back to self-sufficiency. Nonetheless, policy alone cannot solve the current difficulties and the increase in coronavirus cases at the end of June is a harsh reminder of the tremendous fundamental uncertainty that still remains. This uncertainty can be seen in the wide dispersion of projections ranging from GDP to individual companies withdrawing earnings guidance and even questions around school re-openings in the fall. While markets broadly have recovered, certain pockets with less direct Fed support, notably more niche areas in the securitized space continue to offer significant value. Though compressed versus earlier in the quarter, we view spreads on non-governmental fixed income sectors as generally attractive in a historical context; however, the path they have taken to current levels and high degree of uncertainty gives us less clarity regarding the near-term outcomes. With this balance of broad spreads at attractive levels, record pace of new issuance and a high degree of uncertainty, we continue to recommend a judicious approach to implementation.
All investments involve risk, including the possible loss of principal.
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.
The option-adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, which is adjusted to take into account an embedded option. Basis points (bps) represent 1/100th of a percent (for example: 50 bps equals 0.50%).
Taplin, Canida & Habacht, LLC is a registered investment adviser and a wholly owned subsidiary of BMO Asset Management Corp., which is a subsidiary of BMO Financial Corp. BMO Global Asset Management is the brand name for various affiliated entities of BMO Financial Group that provide investment management and trust and custody services. Certain of the products and services offered under the brand name BMO Global Asset Management are designed specifically for various categories of investors in a number of different countries and regions and may not be available to all investors. Products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations. BMO Financial Group is a service mark of Bank of Montreal (BMO).
