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March 25, 2020 at 04:44 PM
As the market responds to the $2 trillion rescue package agreed on by Congress Tuesday night, the impact of the coronavirus on all parts of the market can’t be overstated, especially in the fixed income market, noted experts this week in two webinars, one sponsored by Northern Trust Asset Management and the other by Envestnet.
Colin Robertson, NTAM global head of fixed income, noted that the speed of rates dropping, from 2.50% to 0.25% was “unprecedented,” adding that in the United States, rates still could drop even more “precipitously.”
He pointed out that in the past stimulus packages have had impacts on different areas of the fixed income market. After stimulus started, the best performing markets have been high-yield bonds and emerging market bonds.
However, year to date, high-yield bond performance is down more than 30%, largely because “investors are indiscriminately selling what they can,” he said. Spreads have widened — high-yield adjusted spread was close to 1,000 and investment grade was “more dramatic” at around 330” — and he doesn’t see this “snapping back.”
Further, the default rates of high-yield bonds are being driven by energy. Now the rate for high-yield defaults is 4.5%, but “expectation is energy could be in the 20-30% range,” he said. He added that flight to safety and oil prices will hurt the emerging debt market.
He added:
- Liquidity is the key indicator to watch
- Monetary policy may help liquidity, but fiscal policy will be key to reducing uncertainty
- Be careful on trying to “time” the market
Other Warnings
Avoiding timing the market was a theme echoed by experts who met online with Tim Clift, Envestnet’s chief investment strategist, in a webinar on Tuesday. Stephen Auth, chief investment officer of equities at Federated Hermes, said that odds of picking a bottom were low and people “could be destroyed in the process.” He noted the best thing is to hold on, “the worst thing is to panic and sell.”
Monica Erickson, portfolio manager for DoubleLine, agreed that the speed “at which the [fixed income] market has fallen is unprecedented,” adding that the credit spread widening that happened in 2008 over three months happened now in a week.
“What happened last week was the largest outflow we’ve ever had of the investment-grade market both in total dollar terms and as a percent of AUM,” she said.
She believes the Fed is doing the right thing, yet the moves were “fairly small” compared to the total size of the fixed income market.
This market is “more interesting” than other bear markets from a behavioral standpoint, stated Peter Mallouk, president and CEO of Creative Planning. Although 2008-2009 was much worse because there was more systemic risk, “the difference is the iPhone just came out.” With social media platforms rapidly spreading the dangers comes the “existential risk” of worrying of dying due to the coronavirus.
