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US Unemployment & CARES Act + Global Fixed Income Update
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.
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