October 2020 Fixed Income Market Update

In our view, higher frequency data such as elevated jobless claims and small business employment highlight the risk that the recovery could stall absent additional fiscal stimulus.

News & nuggets

  • On September 30th, the U.S. Senate approved a bill to fund the government until December, preventing a government shutdown. After market close, U.S. Treasury Secretary Steve Mnuchin indicated a deal was reached to include direct payments to individuals as part of a next stimulus package. However, details of the package have yet to be agreed upon.
  • In September, Coronavirus deaths exceeded one million globally and 200,000 in the U.S. While the U.S. is moving to expand re-opening, with states such as Florida further reducing restrictions, Europe appears to be experiencing the feared second wave with several countries reporting record numbers of new coronavirus cases.
  • The final reading of second quarter U.S. GDP showed improvement to an annualized decline of 31.4% from 31.7% at the second reading and 32.9% at the initial reading. Third quarter GDP will be released on October 29, five days before the U.S. presidential election. Current estimates are for roughly 30% GDP growth on an annualized basis.
  • Third quarter corporate earnings are expected to decline 21.2% year over year according to FactSet and 18.0% for calendar year 2020. The calendar year figure is an improvement from last month’s projection of -18.6%. 2021 projections call for a rebound in earnings of 26.0%, a -0.2% change from last month, with revenues rising by 8.1%.
  • After five consecutive months of falling and a cumulative decline of close to 7%, the U.S. dollar rose 1.4% against 10 leading currencies in September as measured by the Bloomberg Dollar Spot Index.
  • The Conference Board’s Consumer Confidence Index jumped by the largest amount in nearly two decades as the index rose from 86.3 in August to 101.8. September was the first month above the 100 level since March.
  • The Federal Open Market Committee met on September 15-16 and signaled that the Fed Funds rate would remain near zero through 2023 and that Treasury and MBS purchases would continue at the current pace in coming months. Additionally, the Summary of Economic Projections accompanying the message highlighted that the committee expects inflation of only 2% in 2023. Incorporating the new average inflation regime, this suggests the first rate hike is not likely to occur until well after 2023. Additionally, Chair Powell once again stated that further fiscal stimulus would be needed to support the recovery.
  • The first presidential debate between President Trump and former Vice President Joe Biden was held on September 29th and was extremely contentious. Though the election cycle has been unfolding for months, the debate marks the home stretch, when the election is likely to be even more in focus in the news cycle. If the debate is an indicator of what to expect, U.S. politics could add to volatility over the coming months.

Outlook and conclusions

In our view, while economic data has been generally improving, higher frequency data such as elevated jobless claims and small business employment highlight the risk that the recovery could stall absent additional fiscal stimulus. Given tensions and political posturing entering the last stages of election season, short-term we believe risk premiums should be higher on the margin until resolution of the election. While the final stage of the election campaign is likely to garner headlines and attention, it is important to keep in mind that the election is only one of the many factors to drive intermediate term results, even if short-term it contributes to volatility. More broadly, uncertainty remains regarding risks of future outbreaks of coronavirus and its potential economic impacts. At the same time, the Fed has stated its intent to continue extraordinarily accommodative monetary policy and demand remains robust, which can be seen in the market readily absorbing record breaking corporate debt issuance. These factors suggest an appetite and support for non-governmental fixed income and the modest spread widening in September has increased the yields and attractiveness of these sectors going into the final quarter of the year.

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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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