14 May 2020
At GAM Investments’ Weekly Fixed Income Meeting held on 12 May, several managers discussed their views on the fixed income space across emerging and developed markets.
Casey Goldmann – US Credit
Investment grade (IG) new issuance is continuing to occur and we are even seeing companies (Disney, ViacomCBS) tap the bond market for a second time this year to ensure liquidity. The market has become somewhat fatigued with the continued supply. New issuance performance is stagnating to some extent and secondary bond spreads have widened.
Tom Mansley – Mortgage-Backed Securities
Prices of residential mortgage-backed securities (RMBS) continue to firm up. This can partly be explained by the extent of current fiscal and monetary policies, which, despite high unemployment, look set to limit the impact of the recession on the housing market, resulting in minimal price declines. Separately, however, prices of commercial mortgage-backed securities (CMBS), typically backed by large retail shopping malls, hotels, and office buildings continue to lag due to a lack of clarity regarding the timing of the lifting of lockdowns and major changes in consumer behaviour that are likely to persist.
Rahul Mathur – Global Rates
In Norway, the Norges Bank surprised last Thursday by announcing a 25 bps cut to 0%. What was particularly notable from the press statement was that the governor was explicit in confirming that negative rates are not likely. In Sweden, yesterday the minutes from the Riksbank April monetary policy meeting were released. At the April meeting, the Riksbank left the policy rate at 0%. But again, what we find interesting was that in the current situation, the board members do not see a rate cut back into negative as appropriate. The minutes indicated that the priority for the Riksbank has been maintaining the supply of credit in the economy by providing liquidity for lending to companies and households, as well as to improve market functioning. We believe these push backs from both central banks should continue to support our positions here. It is also worth noting, in terms of growth comparisons, that so far Sweden has outperformed other countries and, although Norway’s Q1 GDP was very weak, it was nowhere near as weak as the euro area.
In the near term, the demand shock and drop in oil prices are proving to be deflationary, but the outlook for inflation further out is far less clear given the mix of policy stimulus and supply chain damage. A potential driver of future inflation may be de-globalisation and the resurgence of national champions. We are starting to see some signs of soft trade barriers being implemented. China, for example, has recently suspended beef imports from four Australian abattoirs.
Alex McKnight – Global Credit
Emerging markets are recovering at a slower rate than developed markets, where central banks have greater ability to provide economic aid. Meanwhile, risk markets have treaded water successfully over the past week, and a wall of new issuance in credit has continued. As an example, there were five new issues in convertibles this past Monday, an extremely rare occurrence. We are wary of view the high degree of new issuance as a sign of recovery, as we believe any continued rally has the potential to be extinguished by fresh bad news.
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.