U.S. Fixed Income

May 2020 Fixed Income Market Update

In our view, the markets feel much healthier at the end of April than a month ago, but underappreciated in the improved sentiment is not only the scale of March policy action, but its continuation into April.
May 2020

News & nuggets

  • U.S. GDP declined 4.8% in the first quarter, with expectations much worse for the second quarter. Consumer spending declined 7.6%. U.S. retail sales declined 8.7% in March, the largest decline since measurement began in 1992.
  • China experienced its first quarterly decline in GDP (-6.8%) since it began officially tracking GDP in 1992.
  • Oil prices made headlines when futures closed with a negative dollar price, highlighting the continued stress in that market.
  • April become the largest month of U.S investment grade corporate bond issuance on record with approximately $285 billion of issuance, breaking last month’s record of $260 billion. Issuance is up 85% year over year.

Key policy updates in April 2020

Monetary policy

  • April 9: Fed program expansions
    • The corporate credit facilities (PMCFF, SMCFF) were expanded to $750 billion in combined size and now allow for purchases of recent fallen angels, provided the companies were BBB-/Baa3 on March 22nd, and HY ETFs.
    • Eligible collateral for the ABS Facility (TALF) was expanded to accept non-agency AAA rated CMBS and newly issued CLOs. This is a critical step to reopen ABS and CMBS markets.
    • A $350 billion Paycheck Protection Program Facility (PPPLF) was launched to make additional funding available to banks that make loans to small businesses via the government’s PPP program.
    • A $500 billion Municipal liquidity facility was added to provide support to the primary muni market giving the Fed the ability to purchase muni securities with maturities out to 24 months.
    • A $600 billion main street lending program (MSNLF & MSELF) to provide funding to banks lending to small and mid-size businesses.
  • April 29: Fed in no rush
    • Fed Chairman Powell summed up the Fed’s stance after their April 28-29 meeting as: “We’re going to not be in any hurry to withdraw these measures or to lift off. We’re going to wait until we’re quite confident that the economy is well on the road to recovery.”

 

Fiscal policy

  • April 7: Record Japanese stimulus
    • The Japanese stimulus package of over ¥108 trillion (roughly $1 trillion USD) equates to approximately 20% of Japanese GDP.
  • April 10: European stimulus
    • Eurozone countries announced a combined €540 billion stimulus package.
  • April 24: Additional U.S. fiscal stimulus
    • In addition to the $2 trillion CARES act passed in March, the U.S. government passed a $484 billion stimulus package, bringing total U.S. fiscal stimulus close to $3 trillion.
    • The package include $370 billion in aid to small businesses, $75 billion to hospitals and $25 billion for coronavirus testing.

Outlook and conclusions: Wall St. is largely looking past the current stress, while Main St. is living it

In our view, the markets feel much healthier at the end of April than a month ago, but underappreciated in the improved sentiment is not only the scale of March policy action, but its continuation into April. Actions announced in April would ordinarily have remained in headlines and discussion for weeks, but the nearly half trillion dollar U.S. fiscal stimulus package has been treated almost as a footnote to its much larger cousin in March. Similarly, Fed and other central banks not only continued to implement the massive programs initiated last month, but significantly expanded on them. For example, the decision to purchase high yield ETFs and increase corporate debt purchases are meaningful expansions of market support. These functioned to not only keep newly reopened markets going, but to encourage additional capital markets activity. The hope is by keeping access for companies to capital markets, they will be able to survive and keep people employed. However, the most visible result so far is that markets continue to heal with one of the stronger performance months for risk assets in recent memory, while approximately 30 million people have lost their jobs. This highlights the growing disconnect between Wall St. and Main St. As we observed last month, Wall St. is largely looking past the current stress, while Main St. is living it. Fed actions have supported the market recovery and their unsurprising statements that they do not intend to withdraw support too early lend further hope to market stabilization. Markets have healed significantly, but continue to present opportunities. Initially, the dislocation was so severe that broad exposure was compelling. We continue to find broad market spreads attractive, but having seen weaker issuers mixing in with stronger, we view a robust opportunity set, but one requiring a discerning eye to capture. While monetary and fiscal policies have been tremendous supports, there is still significant uncertainty as to when the economy will re-open and what that will look like for the individuals and businesses impacted. As such, we would advise against being lulled by the recent recovery to believe volatility has abated. We hope the worst has passed, but are being cognizant that much is still unknown.

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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.

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.

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