On April 8, 2020, State Street Global Advisor investment experts Andrea Anastasio (Head of Investment Strategy and Research for North America), Simona Mocuta (Senior Economist), Tom Coleman (Global Head of Fixed Income Portfolio Strategy Team) and Matt Nest (Global Head of Macro Strategies) shared their perspectives on (1) the impact of the global economic shutdown on labor markets and (2) the impact that the COVID-19 crisis, and related fiscal and monetary stimulus, have had on fixed income markets.
How much worse we expect the labor markets to get, and whether the provisions of the CARES Act will have an impact.
We expect labor markets to deteriorate as lockdowns broaden across the country and small business and the self-employed struggle with extreme revenue declines. In many cases, it may make economic sense for companies to lay off workers and then rehire them once the new loan is in place and the business is closer to being operational again.
What the implications of the CARES Act might be related to personal income and consumption.
Workers who were previously employed in jobs that were heavily impacted by social distancing policies (e.g., retail, restaurant) could actually see their incomes go up under the enhanced unemployment benefits. Consumption may take a hit in the near term because of consumers’ inability to go out and spend, but this may be a shorter-nature phenomenon than first expected.
In the fixed income market, what the likely effects of wide spreads are.
High Yield and Investment Grade are at levels arguably associated with “distressed” environments. A possible path forward for both might include sharp sell-offs ahead of spikes in defaults, followed by sharp rallies toward their means, and then a slow grind tighter from there to more benign credit environments.
Whether this is a time that investors might consider buying credit.
Buying credit at distressed levels requires fortitude. However, High Yield, when purchased at spreads considered “distressed” (i.e., >900 bps), has a median excess return for the next 12 months of 22.1%. Investment Grade tells the same story but with less magnitude, i.e., buying at spreads >225 bps nets a median excess return of 4.6%1.
What the default picture might look like in this environment.
Defaults in this cycle are difficult to handicap: We’ve had massive Fed stimulus, but that is really focused on Investment Grade issuers – both from an issuance perspective as well as in the secondary market. One piece of good news for High Yield is that issuers generally have time on their side – only 61% of High Yield debt matures within 4 years.
How to identify opportunities, and areas of the market to focus on (or avoid).
We focus on areas of direct support and/or ability to weather the storm. We look for continued catalysts – both fundamental and technical. Lastly, we focus on secular changes that may impact companies, either positively or negatively.
1. Source: State Street Global Advisors
Investing involves risk including the risk of loss of principal.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
The views expressed in this material are the views Andrea Anastasio, Simona Mocuta, Matt Nest, and Tom Coleman through the period ended April 8, 2020 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
All information is from State Street Global Advisors unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The information provided does not constitute investment advice and it should not be relied on as such. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
Issued by State Street Global Advisors, Australia Services Limited (AFSL Number 274900, ABN 16 108 671 441) ("SSGA, ASL"). Registered office: Level 14, 420 George Street, Sydney, NSW 2000, Australia · Telephone: 612 9240-7600 · Web: www.ssga.com.
State Street Global Advisors, Australia Services Limited (ASL) (AFSL Number 274900, ABN 16 108 671 441) is the issuer of interests and the Responsible Entity for the ETFs which are Australian registered managed investment schemes quoted on the AQUA market of the ASX or listed on the ASX. This material is general information only and does not take into account your individual objectives, financial situation or needs and you should consider whether it is appropriate for you. You should seek professional advice and consider the product disclosure document, available at www.ssga.com/au, before deciding whether to acquire or continue to hold units in an ETF. This material should not be considered a solicitation to buy or sell a security. ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETF's net asset value. ETFs typically invest by sampling an index, holding a range of securities that, in the aggregate, approximates the full index in terms of key risk factors and other characteristics. This may cause the fund to experience tracking errors relative to performance of the index. Investing involves risk including the risk of loss of principal. Diversification does not ensure a profit or guarantee against loss. Holdings and sectors shown are as of the date indicated and are subject to change. This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future. Sector ETF products are also subject to sector risk and non-diversification risk, which generally results in greater price fluctuations than the overall market. SPDR and Standard & Poor's® S&P® indices are trademarks of Standard & Poor's Financial Services LLC and have been licensed for use by State Street Corporation. The Dow Jones Global Select Real Estate Securities Index is a product of S&P Dow Jones Indices LLC and has been licensed for use by State Street Global Advisors, ASL. MSCI indices, the property of MSCI, Inc. ("MSCI"), and ASX®, a registered trademark of ASX Operations Pty Limited, have been licensed for use by State Street Global Advisors, ASL. SPDR products are not sponsored, endorsed, sold or promoted by any of these entities and none of these entities bear any liability with respect to the ETFs or make any representation, warranty or condition regarding the advisability of buying, selling or holding units in the ETFs issued by State Street Global Advisors, ASL. State Street Global Advisors Trust Company (ARBN 619 273 817) is the trustee of, and the issuer of interests in, the SPDR® S&P 500® ETF Trust, an ETF registered with the United States Securities and Exchange Commission under the Investment Company Act of 1940 and principally listed and traded on NYSE Arca, Inc. under the symbol "SPY". State Street Global Advisors, ASL is the AQUA Product Issuer for the CHESS Depositary Interests (or "CDIs") which have been created over units in SPY and are quoted on the AQUA market of the ASX. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street Global Advisors, ASL's express written consent.