Fixed Income

In recent weeks we’ve seen significant sell-offs across all asset classes as investors have been scrambling for liquidity. With most of Europe and the US effectively in lockdown, a recession looks to be inevitable and the question is what this will do to corporates’ ability to service and refinance their outstanding debt, especially for those in the sub-investment grade space.

It has been a challenging couple of weeks for obvious reasons.

As we approach the 10th anniversary of running our Multi-Sector Bond strategies, we have once again hit a period of remarkable market turbulence that has broken records in terms of how quickly prices have deteriorated across markets including fixed income. Consequently we thought it would be useful to share some more detailed thoughts with you on what will be my fifth occasion of writing such a letter. We hope that you find it useful.

These are clearly unprecedented times. We are seeing large gaps down in asset values, large liquidity preference and sometimes positive correlations between risk assets and risk-off hedges.

RMBS bondholders should not fear lenders accommodating borrowers’ short term needs for an extended period of time.

The authorities are now rapidly promising huge aid packages, but how do these aid packages find their way to the people that need aid? This is what is missing

In the last few days the World Health Organisation has declared COVID-19 a global pandemic, the Italian government has imposed a nationwide lockdown on 60 million people, and President Trump has banned all travel to the US from Schengen Area European countries for 30 days.

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.

Companies, even earnings pressured ones, now need to seriously consider the negative impact on their long term cost of capital from short term decisions to shore up P&L.

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.

While there has been a rally in risk-off assets since January over coronavirus fears, credit markets have been largely resilient given strong technical demand, driven by huge inflows for bond funds and the wall of cash sitting on the sidelines.