18 June 2020
At GAM Investments’ Weekly Fixed Income Meeting held on 16 June, several managers discussed their views on the fixed income space across emerging and developed markets.
Florian Komac – European Credit
A risk rally was visible across European high yield (HY) and investment grade (IG) bonds in the first week of June, although half of the gains were eroded last week.
On 4 June it was announced that the European Central Bank (ECB) would increase its Pandemic Emergency Purchase Programme (PEPP) from EUR 750 billion to EUR 1.3 trillion, which was bigger than expected. Meanwhile, the European Union (EU) has signed off legislation which provides capital relief to European banks by offsetting losses on their holdings of government bonds due to the coronavirus pandemic.
European economies and borders continue to open up. There is also renewed focused on Brexit. The UK has ruled out trade deal extension however there does appear to be goodwill on both sides to get an agreement in place before the end of December, as otherwise a “Hard Brexit” would be inevitable.
Casey Goldmann, Jack Flaherty – US Credit
US IG and HY spreads widened last week. However, spreads have tightened following an announcement by the Federal Reserve (Fed) on 15 June which revealed details on the purchase of corporate bonds using an index-based approach. New issuance is continuing and it appears a significant amount of cash is available to subscribe to offerings.
Tom Mansley – Mortgage-Backed Securities
Underlying MBS assets look healthy, in our view. Prices are continuing to recover as liquidity seeps back into the market. Unemployment remains high, but will decline. Importantly, forbearance plans are in place to take care of homeowners’ temporary cash flow problems. It looks unlikely that there will be a second lockdown. The US has flattened the coronavirus curve to the point where it is tolerable in exchange for the economic damage inflicted, and it appears that regardless of a minor resurgence of the virus, the economy will continue reopening and people will continue to return to work.
Rahul Mathur – Global Rates
A number of themes have benefited from the improving risk backdrop as well as from idiosyncratic drivers. In Norway, the central bank has stepped up its daily purchases of the krone in order to fund fiscal spending. Also in Scandinavia, Sweden is no longer the lowest rate holder after the policy rate conversion that has taken place over the last few months. Elsewhere, the Reserve Bank of New Zealand has communicated that rates are likely to be on hold for the rest of the year. The New Zealand economy has been one of the first to reverse the lockdown and is now one of the most open economies in the G10. This can be seen via the normalisation of actual activity data, such as phone mobility data, across the country. One of the more interesting developments has been the Federal Reserve’s over-delivery on single name credit purchases, which potentially closes the door on yield curve control for now.
Alex McKnight – Global Credit
The central banks have communicated their extensive economic support in the face of Covid-19. Lockdowns are easing internationally, which may indicate a changing attitude towards the pandemic. Credit issuance, after a brief pause last week, is rising once again, as people are willing to spend more. Overall, credit has performed well, and it would seem that risk is on for the time being. Options are also notably cheaper.
Paul McNamara – Emerging Market
Emerging markets have generally traded in line with risk assets. There is not a significant amount of differentiation within the asset class, and it is difficult to detect any strong effects of fundamentals. The US has typically been viewed as a perpetual safe place, where growth is protected; however, the potentially premature re-opening of several US states may challenge the dollar’s status as a safe haven.
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. June 2020.