Ben Edwards, Portfolio Manager at BlackRock
AROUND THE WORLD: A FIXED INCOME PERSPECTIVE Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
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orporate Bond markets experienced an unprecedented volatility event, in March, in reaction to what will likely be the largest economic shut-down in history and what was the worst month for total returns on record.¹ In response to the spreading Covid-19 virus, developed world governments, instituted unparalleled lockdowns and, to varying degrees and with the support of aggressive central bank policies, sought to replace the lost private sector demand with massive government spending packages.
The lack of perceived moral hazard has emboldened politicians to do more, faster and with little regard for the eventual costs.
The scope of the announced policy action is truly epic, with new rate cuts and bond buying programs effectively clearing the way for governments to borrow any amount to buttress the economy during an economic collapse that unlike the global financial crisis (GFC) is seen as a “no fault” recession. The lack of perceived moral hazard has emboldened politicians to do more, faster and with little regard for the eventual costs – we are all in this together.
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Invest
Spring 2020 www.rsmr.co.uk
The US, alone, has seen rates cut to zero,² a commitment of the Fed to buy an unlimited amount of treasuries, new programs to purchase corporate bonds (never used during the GFC) and a fiscal expansion that may top $3 trillion* (or around 15% of GDP).³ Here, £200bn of additional BOE bond purchases has seen gilt purchases double that of any period since its 2009 inception and, not coincidentally, enough to absorb the increase in issuance that will fund the governments Covid-19 response.⁴ We witnessed government bond markets oscillate over the month, rallying strongly to reflect the worsening economic outlook, selling off in anticipation of increased supply on fiscal expansion and finally rallying back to incorporate aggressive quantitative easing policies.
As we look at markets today, it seems that the US, UK and, to a lesser extent, Europe have commenced a form of implicit yield curve control, joining Japan, for as long as the virus poses a threat to economic activity. Undoubtedly, one risk is that temporary, crisis era policies have proved extremely difficult to unwind once the crisis is over.
