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September 2020 Fixed Income Market Update

In our view, U.S. corporates appear attractive even noting the recompression of spreads since the first quarter.

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News & nuggets

  • Shinzo Abe, Japan’s longest serving Prime Minister, announced he would resign due to health concerns. Abe has been known for a program designed to revive Japan’s economy, dubbed Abenomics, which combined policy supports and structural reforms.
  • With about 98% of second quarter earnings reported, earnings declined 31.8% year over year according to FactSet. This was the worst quarterly earnings period since the first quarter of 2009, but an improvement vs. the end of July figure (-35.7%) when about 2/3 of companies had reported. Estimates are for a 18.6% decline in earnings for calendar year 2020 with revenues falling 3.1% and a rebound in earnings of 26.2% in 2021 with revenues rising by 8.1%.
  • As of the end of August, the trend in coronavirus cases has been improving in the U.S., though Europe appears to be facing an uptick. Multiple countries saw new cases at their highest levels in months, with Spain, Italy, France, and the UK all reporting multi-month new highs in cases. On the positive side, Abbott Laboratories has won U.S. clearance for a 15-minute rapid test that will be priced at just $5.
  • The U.S. dollar continued to weaken in August, falling 1.5% against 10 leading currencies as measured by the Bloomberg Dollar Spot Index. Since the end of April, the dollar has fallen 6.9% against the basket. Since April, the dollar has fallen in value from $1.10 per Euro to $1.19 per Euro.
  • The Fed released minutes on August 19 for the July 28-29 meeting. Of note, the minutes suggested that officials were still uncertain about yield curve control, which came as somewhat of a disappointment to the market. The minutes noted “that yield caps and targets would likely provide only modest benefits in the current environment, as the Committee’s forward guidance regarding the path of the federal funds rate already appeared highly credible and longer-term interest rates were already low.” They also noted the challenge that there are “potential costs associated with yield caps and targets.”
  • In coordination with Fed Chair Powell’s commentary at the Jackson Hole Symposium, the Federal Reserve announced a revision to their longer-run goals and monetary policy strategy. As expected, the FOMC will retire its symmetric 2% inflation target, in favor of aiming to achieve an inflation rate averaging 2% over time. The Fed also adjusted its maximum employment objective, by focusing primarily on shortfalls from the maximum employment level rather than deviations as it had previously.

Outlook and conclusions

In our view, in a landscape of improved risk sentiment and strong demand for yield, U.S. corporates appear attractive even noting the recompression of spreads since the first quarter. While corporates have retraced a significant portion of their year to date widening, other sectors and asset classes have gone further, leaving corporates relatively well positioned. With global government yields as low as they are, demand for income is strong. At the same time, the March volatility is still fresh, making the more balanced profile of investment grade corporates appealing. Further, with the Fed’s changes to inflation policy, an even longer timeline for accommodation appears on the horizon. To date, the Fed’s accommodative policies have kept rates low while risk assets have rebounded and this longer timeframe for accommodation could keep this dynamic in play for a prolonged period. The recent downward trend in coronavirus cases in the U.S. along with hopes of improved testing have sparked optimism, but we do not discount the possibility of future volatility. While some economic data such as economic growth is expected to improve, other data such as employment figures remain challenged, highlighting the remaining uncertainty and need for balance in portfolios.

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Disclosures

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.

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