Notes from the Desk: Credit Team Observations
Forced selling to meet redemptions has caused the investment grade curve to invert. This is because short-dated paper is easier to sell, but the lower levels have increased yields tremendously. As an example, the Bloomberg Barclays US Corporate 1-5 Year Bond Index (short-dated investment grade credit) was down 5.6% year-to-date through this past Monday, March 23, while the Bloomberg Barclays US High Yield 0-5 Year Bond Index (short-dated high yield credit) was down 18.2% for the same period. The Bloomberg Barclays US Corporate Bond Index (comprised of investment grade credit) was down 10.0% year-to-date with a yield-to-worst of 4.4% (before the crisis the yield was 2.2%). The Bloomberg Barclays US Corporate High Yield Bond Index was down 19.8% year-to-date with a yield-to-worst of 10.8% (yield was 5.1% prior to the crisis).
Liquidity reminds us of 2008. Panic selling and forced selling has caused even the best credits to gap down multiple points. We’re hearing from sell-side traders that the worst selling occurred in the middle of last week, and pressure seems to have paused for the moment. But the dislocation in prices has been relentless and widespread. Investment grade credits impacted by the virus have blown out by 100 basis points or more. Disney is a prime example, with its 10-year bonds down 15 points and its 20-year bonds down 30 points. Distressed investors are seeing opportunities in energy and investment grade bonds that are trading with high-yield-like yields. Credit in announced merger-related situations is trading like there is no deal on the table, with exchange-traded funds and other sellers pushing bonds down to high-yield market levels.
The Federal Reserve has been very proactive and positive in seeking to stabilize the various funding markets, most recently announcing a massive series of programs designed to support municipalities and businesses both big and small. These actions are incredibly important for the functioning of capital markets and assisting investors with liquidity. However, they do not and cannot solve the ultimate problem, which is containment and treatment of the novel coronavirus. The duration and scale of the eventual impact to the economy remains uncertain, and at this point only the passage of various support measures from the federal government, a resumption of more normal activity (as we are hearing about in China), and/or developments on a COVID-19 treatment or vaccine are likely to spur markets to move upward again.
Material represents the manager’s opinion and should not be regarded as investment advice or a recommendation of any security or strategy. Our views are a reflection of our best judgment at the time of the commentary and are subject to change any time based on market and other conditions, and we have no obligation to update them. Investing involves risk, including loss of principal. Past performance is not indicative of future results. Short-term performance may not be indicative of long-term performance. Indexes are unmanaged and one cannot invest in an index. Visit the glossary for definitions of terms and indexes.