07 May 2020
At GAM Investments’ Weekly Fixed Income Meeting held on 05 May, several of our portfolio managers discussed their views on current market conditions.
Amy Kam – Asia Credit
Increased pressure on US / China trade talks has led to caution in the market. Separately, we are excited by India’s huge ESG potential stemming from Prime Minister Modi’s objective for long-term growth in renewable energy. Second, there is a lot of mispricing in the market, particularly in China, which opens up attractive entry points in our view.
Florian Komac – European Credit
The European Central Bank (ECB) had decided to ease monetary policy further by reducing the interest rate on targeted longer-term refinancing operations (TLTRO III) operations from June 2020 to June 2021 to 50 bps below the average interest rate on the Eurosystems main refinancing operations (which is currently at 0%). Meanwhile, a new series of non-targeted pandemic emergency longer-term refinancing operations (PELTROs) will be conducted to support liquidity conditions in the euro area financial system. Although the EUR 750 billion Pandemic Emergency Purchase Programme (PEPP) has not yet been increased, officials have been clear that it could be extended if circumstances warranted it.
Germany's constitutional court has given the ECB three months to prove that its key bond-buying programme is justified and appropriate after arguments that the ECB’s Asset Purchase Programme (APP) programme, in place since 2014, has strayed into monetary financing of governments, which is illegal under the EU treaty. This, however, should not affect the current PEPP. While matters will likely be resolved, this could be regarded as another small crack in the foundation of the euro and is possibly another barrier to eurozone solidarity during the Covid-19 crisis. At the very least, the timing can be seen as unfortunate.
Dorthe Nielson – EM Credit
Q1 results from companies in Latin America are reasonably encouraging. Businesses in the region appear to be boosting their liquidity profiles, which is a positive sign. We have seen corporate restructuring offers out of Argentina. One restructuring deal in particular is based around a 12 month debt service holiday. Again, this is a good sign, as corporates are not simply throwing in the towel and asking for haircuts, unlike the sovereign.
Adrian Owens – Global Rates
Sweden has taken a unique approach to combatting Covid-19. Unlike other nations, it is relying on voluntary social distancing measures, rather than locking down the economy. As a result, we might begin to see better economic data emerging from the country in relative terms. While the impact of the virus appears to have been worse for Sweden than other Nordic countries, evidence suggests Sweden has fared better than most of continental Europe. Also in Scandinavia, Norway has seen its currency react to the collapse in oil prices; however, it has been one of the first economies to loosen virus-related restrictions. The government has increased the money it is repatriating via sales from the Petroleum Revenue Fund, which translates into daily purchases of USD 200 million worth of Norwegian krone.
Mexico, meanwhile, has implied that it is interested in cutting interest rates. We have sympathy for the dovish view of Mexican central bank deputy governor Jonathan Heath, which we believe argues for owning Mexican bonds largely hedged for now.
As we move towards a degree of normality, investors are debating the potential for inflation versus disinflation. In our opinion, both arguments have merit. Near-term concerns are certainly rooted in the risk of disinflation, but what does this mean in the long term? We find that longer-end inflation breakevens that are currently pricing below target remain very interesting.
Paul McNamara – EM Debt
Emerging markets (EM) have had a better crisis in terms of casualty rates and infections. While we recognise that in some cases, such as Russia, there is a risk of inaccuracy in reporting data, we feel that other factors, such as climate, have affected the relatively lower rates of infection. North Asia countries such as South Korea and Taiwan have somewhat contained the spread of infection, which suggests they may fare better than the rest of the world during the recovery phase. Other countries, such as Singapore, have been extremely aggressive in testing, and the populace has more or less locked themselves down voluntarily. What is clear is that we cannot afford to be too simplistic about the spread of the virus and its immediate economic impacts.
Casey Goldmann, Jack Flaherty – US Credit
Boeing completed a USD 25 billion bond deal on 30 April, the largest bond deal this year. Demand was strong and the deal reportedly received USD 70 billion of orders at peak. Despite a weak performance initially, the bonds have performed well. Many recent investment grade (IG) new issues have been pricing well, with little to no concessions. Overall, there is an extraordinary amount of money seemingly available for deals, including in the quality high yield (HY) space.
US state finances could be one separate area to watch. Early indicators suggest some states’ finances look abysmal due to Covid-19 impacts and it is uncertain whether the federal government will bail them out.
Source: GAM unless otherwise stated. The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Reference to a security is not a recommendation to buy or sell that security. The companies listed were selected from the universe of companies covered by the portfolio managers to assist the reader in better understanding the themes presented. The companies included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. May 2020