Monetary Policy

After a period of material weakness in spreads and general market stress, the common ingredient to recent corporate bond spread stability and subsequent strength has been the resurgence of the primary market.

In response to the exceptional circumstances brought about by Covid-19, the Prudential Regulation Authority (PRA) at the Bank of England has written to UK banks asking them to ‘consider’ appropriate action regarding the payment, accrual and vesting of variable remuneration (i.e. bonuses) for senior staff, together with any dividend payments or share buyback plans.

With central banks and governments pumping huge amounts of funding into their domestic economies, they are obviously very keen that companies act with prudence and look after their surplus cash sparingly, by cutting back on distributions such as dividend payments and any share buyback plans.

Partner and Portfolio Manager Eoin Walsh provides an update on recent market developments and looking at the portfolio positioning of the Strategic Income Fund.

Our take on all of this is that the central bank has acted in a very targeted and timely way, adding large volumes of liquidity at even lower rates, along with significant capital to the banking system.

Monday was one of those days investment professionals will remember all their lives, and compare with similar standout days from the past.

The big question for us now is how long the impact of the virus may last, and how much of a supply and demand shock will there be as a consequence of the various efforts to stall its spread.

Given where asset prices are at the moment, we would categorise inflation as a low probability, but high impact, risk.

Next month’s budget now has the green light to be Johnson’s fiscal bazooka, with tax cuts, housing schemes and infrastructure projects already mooted.

After a year of over 100 rate cuts around the world in 2019, we felt that 2020 would see major central banks engage wait-and-see mode.

Partner and Portfolio Manager Felipe Villarroel recently hosted a webinar providing an outlook for credit markets in 2020, highlighting investment themes and sectors that still offer fixed income investors good relative value.

In what was Mark Carney’s last meeting as governor of the Bank, the MPC delivered a mixed message.