March proved to be the best of times and the worst of times for fixed income markets.
Of course, it was historically terrible for liquidity and spreads in secondary markets. But the primary market for U.S. and European investment grade debt stayed wide open, with new issues topping $135 billion.
The average for March over the past five years has been just half that, around $70 billion. In September 2008, the month that Lehman Brothers folded, only $15 billion of U.S. and European investment grade debt made it to market.
That tells us something important about the unique nature of the current crisis, the official response to it, and the way fixed income investors might think about their allocations.
The first thing it tells us is how important it was that the major central banks acted quickly to support credit markets that are mission-critical for the economy.
The European Central Bank had already been buying investment grade corporate credit in its asset purchase programs. With its Pandemic Emergency Purchase Program, it ramped up the numbers and included non-financial commercial paper in the mix for the first time.
The Federal Reserve reopened its Commercial Paper Funding Facility and, for the first time, expanded its asset purchases to include investment grade corporate bonds, via its Primary Market and Secondary Market Corporate Credit Facilities.
That gave the investment grade markets the confidence to retrace about 60 to 80 basis points of spread-widening and do $135 billion of primary business in March. The A and AA rated issuers of mid-March have been joined by some BBB names lately, such as T-Mobile. The average “new issue concession,” or the premium paid to primary market buyers over the secondary market, has narrowed quickly.
This is an important difference between today and the financial crisis of 2008 – 09.
It’s shocking that central banks are having to help household names which, in the financial crisis, may have seen their cost of capital spike, but still had revenue coming in the front door.
But with some looking at virtually zero cash flow in the coming weeks, it’s reassuring that banks and capital markets are in good enough shape to lend to them. Eleven years ago, these markets were freezing. Today, they are acting as the transmission conduits for central bank intervention to save the economy’s large, strategic businesses.
How might investors read this situation?
Last week, in his “Safety First” perspective on the coming months, Erik Knutzen identified investment grade credit as an attractively valued opportunity. We agree, and we feel confident about adding risk selectively here. But a lot of that value and confidence comes from Fed and ECB support, which will likely bolster both liquidity and solvency over the coming months.
Asset classes that are not currently supported by the central banks, such as high yield bonds, pose more complex questions.
While not quite the worst of times for that market, it has not been open for business. A handful of issues over the past few days have just started to thaw a freeze dating back to March 4.
At a time when new precedents are being set every day, never say never to the Fed stepping in behind high yield. It does seem unlikely, however. A lot of that issuance is sponsored by private equity, which is likely to be called upon to inject new capital into its companies before getting official help, beyond what’s in fiscal packages for smaller businesses.
Nonetheless, we still think high yield spreads approaching 1,000 basis points overstate the likely default rate to come and represent potential value. Those spreads could easily widen further, but for long-term investors now may be an opportune time to sort through these names, looking for companies with robust fundamentals and—most critically—cash reserves, access to liquidity and longer-dated debt maturities.
The corporate survivors of the COVID-19 crisis will likely include both investment grade and high yield issuers. In this worst of times for the economy, we may be in one of the best of times for the long-term return outlook. But not every issuer will be supported through this, and rigorous selectivity will be critical, particularly in high yield.
For more discussion of Neuberger Berman’s credit market thinking, see our video, featuring Deputy CIO of Fixed Income Ashok Bhatia, Co-Head of Investment Grade David Brown, Head of Non-Investment Grade Joe Lynch and Co-Head of Private Credit Susan Kasser.
In Case You Missed It
- Euro Zone Consumer Price Index: +0.7% in March year-over-year
- S&P Case-Shiller Home Price Index: January home prices were flat month-over-month and increased 3.1% year-over-year (NSA); +0.3% month-over-month (SA)
- U.S. Consumer Confidence: -12.6 to 120.0 in March
- China Manufacturing Purchasing Managers’ Index: +16.3 to 52 in March
- ISM Manufacturing Index: -1.0 to 49.1 in March
- U.S. Initial Jobless Claims: +6,648,000 in the week ending March 28
- U.S. Employment Report: Nonfarm payrolls decreased by 701,000 and the unemployment rate increased to 4.4% in March
- ISM Non-Manufacturing Index: -4.8 to 52.5 in March
What to Watch For
- Wednesday, April 8
- FOMC Minutes
- Thursday, April 9:
- U.S. Initial Jobless Claimsx
- U.S Producer Price Index
- Friday, April 10
- U.S. Consumer Price Index
Statistics on the Current State of the Market – as of April 3, 2020
|S&P 500 Index||-2.0%||-3.7%||-22.6%|
|Russell 1000 Index||-2.5%||-4.0%||-23.4%|
|Russell 1000 Growth Index||-2.0%||-4.1%||-17.6%|
|Russell 1000 Value Index||-3.1%||-4.0%||-29.6%|
|Russell 2000 Index||-7.0%||-8.7%||-36.7%|
|MSCI World Index||-2.6%||-4.1%||-24.2%|
|MSCI EAFE Index||-3.7%||-4.6%||-26.3%|
|MSCI Emerging Markets Index||-1.2%||-1.9%||-25.1%|
|STOXX Europe 600||-2.8%||-4.9%||-28.0%|
|FTSE 100 Index||-2.0%||-4.8%||-27.5%|
|CSI 300 Index||0.1%||0.7%||-9.4%|
|Fixed Income & Currency|
|Citigroup 2-Year Treasury Index||0.1%||0.0%||2.8%|
|Citigroup 10-Year Treasury Index||1.5%||1.0%||12.8%|
|Bloomberg Barclays Municipal Bond Index||-2.1%||-1.8%||-2.4%|
|Bloomberg Barclays US Aggregate Bond Index||0.7%||0.3%||3.4%|
|Bloomberg Barclays Global Aggregate Index||-0.5%||-0.4%||-0.7%|
|S&P/LSTA U.S. Leveraged Loan 100 Index||3.0%||-0.8%||-10.6%|
|ICE BofAML U.S. High Yield Index||-1.0%||-2.4%||-15.2%|
|ICE BofAML Global High Yield Index||-0.9%||-1.8%||-15.7%|
|JP Morgan EMBI Global Diversified Index||-0.4%||-0.6%||-13.9%|
|JP Morgan GBI-EM Global Diversified Index||-3.0%||-2.5%||-17.3%|
|U.S. Dollar per British Pounds||-0.8%||-1.1%||-7.5%|
|U.S. Dollar per Euro||-2.3%||-1.6%||-3.8%|
|U.S. Dollar per Japanese Yen||-0.3%||-0.5%||0.2%|
|Real & Alternative Assets|
|Alerian MLP Index||7.5%||1.8%||-56.4%|
|FTSE EPRA/NAREIT North America Index||-11.1%||-10.0%||-36.3%|
|FTSE EPRA/NAREIT Global Index||-7.4%||-7.6%||-33.8%|
|Bloomberg Commodity Index||-0.8%||0.5%||-22.9%|
|Gold (NYM $/ozt) Continuous Future||1.3%||3.1%||8.0%|
|Crude Oil WTI (NYM $/bbl) Continuous Future||31.8%||38.4%||-53.6%|
Source: FactSet, Neuberger Berman.