5 minute read
BLACKROCK: Fixed income
Ben Edwards, Portfolio Manager at BlackRock
AROUND THE WORLD: A FIXED INCOME PERSPECTIVE
Corporate 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 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.
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.
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.
Yield curve control poses challenges for investors. It is unlikely that, without an inflation spike, yields can move much higher, but it is also likely that, without even graver (depression-like) economic outcomes, yields can move much lower. In the short term, risks appear to be alleviated but in the long term the combination of large government spending, with little political constraint and increasing monetary intervention, with little concern for unintended consequences could prove a mix that shifts the investing landscape from the one that has benefited all investors for the last 30 years. We are defensive in our duration positioning, for this reason.
With respect to corporate bonds, spreads have recovered strongly from the lows, reflective entirely of policy action.¹ Short term visibility on earnings has evaporated and default risk for weaker companies has increased, markedly. We began the year with conservative exposure to credit risk, holding high levels of cash and gilts, low levels of subordinated financials and record low amounts of sub-investment grade debt. As credit markets weakened, we found incredible opportunities to add to long dated debt from high quality companies, whose operations are resilient to economic downturns and where issuers were happy to pay large premiums to issue bonds to prove access to debt markets in turbulent times. We increased our corporate bond holdings materially, and feel we’ve been able to build positions that should drive performance over the next 12-18month.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. n
* All amounts given in USD.
1 Measured by ICE BofAML Sterling Non-Gilt index 31 March 2020 & 30 April 2020
2 The Federal Reserve, Federal Reserve issues FOMC statement, 15 March 2020
3 The Federal Reserve, Federal Reserve takes additional actions to provide up to $2.3 trillion in loans to support the economy, 9 April 2020
4 Bank of England, Monetary Policy Summary for the special Monetary Policy Committee meeting, 19 March 2020
Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.
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