Jenna Barnard, Co-Head of Strategic Fixed Income, remarks on the significant rally in credit markets over the last week, with healthy investment grade issuance volumes and even the US high yield market open for new issues. Support from the authorities trying to help companies avoid default has accelerated the sharp market recovery.
Following two to three weeks of strength in credit markets in which we have found it hard to source bonds to purchase, last week saw a further significant rally in all forms of credit. While companies have been focused on liquidity, and equity holders demanded they improve balance sheets, governments and central banks were also signalling strongly that they want to minimise corporate defaults.
The most significant action came from the US Federal Reserve (Fed) on Thursday 9 April, given the sheer size of the corporate bond purchase programme and the extension of eligibility to recent and prospective fallen angels in the high yield market.
We remain positive on corporate bonds: when we emerge from this crisis, we will be in a very low interest rate environment throughout the developed world and there will be a need for income.
Today is Wednesday 15 April and this is the latest video update that John and I are trying to provide to clients on a weekly basis.
An enormous rally in credit markets
The first thing to say is that there has been an enormous rally in all forms of credit over the last week, but really builds on a market in which it has been really difficult to buy bonds for the last two or three weeks since the liquidity crisis subsided and that kind of peaked in around late March.
So, credit has been the place to be, companies have been focused on liquidity, equity holders have been taking pain through dividend cuts and share placements but the asset allocation clock had already shifted in favour of credit dramatically. I think we see that in the fund managers’ survey from Bank of America where equity investors are, you know, very focused and demanding companies to improve balance sheets and liquidity.
Fed action significant in accelerating the rally
But the Fed’s action last Thursday really accelerated the credit rally, not only in the size of the corporate bond purchases - US$750bn – but also stretching down to fallen angels in the high yield markets. And the Fed is very focused really on providing a liquidity bridge to companies. Their corporate bond schemes are primary market focused, so new issuance of bonds, which contrasts with the European Central Bank, which has historically been very secondary market focused or existing bonds in issue.
So, the Fed, the central bank, is trying to provide liquidity to the companies to bridge the next three to six months and both governments and central banks are signalling strongly that they want to minimise corporate defaults. So not only are equity investors demanding companies focus on balance sheets but governments and central banks are also trying to help companies avoid defaults. Because frankly if companies are not around in six months’ time, who is going to hire back these workers?
So, it is a very powerful combination for credit markets — credit spreads have been extremely attractive, getting to the kind of levels that they get to once in a decade and we, you know, appear to be making progress in terms of supportive action from authorities.
Since March we have been increasing our exposure to corporate bonds
Our fund information will be out tomorrow and in that you can see how we used the opportunity to add credit risk, both by purchasing investment grade corporate bonds in March and also adding credit risk in high yield through derivative exposure of credit default swaps in indexes.
So, we remain positive on corporate bonds. Throughout this crisis we’ve said that ultimately when we come out the other side we are going to be in a very low interest rate world — throughout the developed world, and there will be a need for income. So, locking in decent income from the kind of quality credits that fits our credit style has been a focus throughout. How we got there and how quickly credit rallied back we weren’t sure, but we knew that we had to push on in that direction.
So, as I said the information from the funds will be out shortly for the month of March, we continued to execute on that through April and the Fed’s action last week has really accelerated what was a market that was recovering sharply already — so healthy, very healthy record new issuance volumes in the investment grade and even the US high yield market is now open for new issuance.
So, with that I wish you good luck and we’ll do a video again next week.
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