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After the ECB offered more support for the EA on 4 June, extending asset purchases and lifting risk appetite, the US Federal Reserve had its turn last week. As expected, the FOMC reiterated its strong support for the economy in the post-pandemic recovery. The Fed also signalled asset purchases would continue “at least” at the current pace and insisted they would keep rates near zero until 2023.
That commitment is consistent with new economic projections reflecting a slow and incomplete recovery. While the Fed expects a relatively dynamic recovery in the second half of 2020, the projections beyond that point remain conservative, with the unemployment rate still well above pre-crisis levels.
Despite the Fed's strong commitment, risk appetite consolidated further on Wednesday and Thursday last week. Equity prices fell by more than 6% over two days, and US Treasury 10Y clawed back to below 0.7%. Meanwhile, the USD stabilised after a long downtrend.
Much has been noted about rotation and reflation in the past few weeks. The market reaction we saw last week supports the view that, if central banks can support risky asset prices by reducing the risk-free rate and capping risk premia, there may be a limit to how much they can propel prices higher while economic prospects remain weak and uncertain. We also remain wary of a second virus wave in the US and further increases in COVID-19 cases in Latin America, which could dash hopes created by the easing of lockdowns in Europe and Asia.
So the key question for investors is, Where to invest in a market characterised by an high velocity and liquidity? In our view, global convertible bonds appear well suited to navigate the current uncertain and potentially more volatile markets.
What have convertible bonds done so far and what profile do they offer the investor who wants to stay invested?
Global convertible bonds exhibit an interesting balance between growth and protection thanks to their hybrid nature. With more than $60 billion in new issues year to date1, the companies tapping the market range from faster-growing tech and health care companies to cash-strapped retailers offering potential upside value as they turn to the market with concessions that investors have seized.
Since the beginning of the year, and during of the ensuing turmoil, global convertible bonds have played their role in protecting versus the downside of equity exposures. Moreover, thanks to a lower exposure to energy, convertible bonds have outperformed high yield corporate bonds, notably US high yield. Since the market trough, new issuance has been strong and the specific profile of the global convertible bond universe has been a beneficiary of the catch-up in riskier assets (see Figure 1).
Figure 1: YTD Cumulative Performance (in USD unhedged)
Source: State Street Global Advisors, Bloomberg Finance L.P., as of 12 June 2020. Past performance is not a reliable indicator of future performance. It is not possible to invest directly in an index. Index performance does not reflect charges and expenses associated with the fund or brokerage commissions associated with buying and selling a fund. Index performance is not meant to represent that of any particular fund.
There are regional differences, with the larger US exposures providing growth and higher equity-like opportunities, while Europe and Japan can offer quality and defensiveness. The relative cheapness of Asia helps to provide investors with convexity and diversification, as volatility has receded to below 30s while deltas have hit higher levels (see Figure 2).
Convertible bonds can also offer a balance between large, mid and small cap names, which stand to benefit from the various sequences of equity recoveries. In terms of sectors, the skew towards health care and technology is welcomed, as they remain more protected in the recovery post COVID-19. Last, the convexity of the exposure is a helpful drawdown dampener in a still uncertain world.
Figure 2: Refinitiv Qualified Global Convertible Bond Index – delta evolution
Source: State Street Global Advisors; Bloomberg Finance L.P., as of 10 June 2020.
The three engines of convertible bonds (rates via coupons, equity and volatility) have been re-ignited. Investors could consider this an ‘auto-allocation’ tool while we wait for further improvement and scrutinise leading indicators for confirmation that we are on the long road to recovery.
For investors hoping to investigate this topic further, we invite you to read our recent note,
Sources: Bloomberg Finance L.P., for the period 5-13 June 2020. Flows are as of date indicated and should not be relied upon as current thereafter.
1 Source: BofA Merrill Lynch, as of 11 June 2020.
2 Prior to 29 May 2020, the Fund was known as SPDR Thomson Reuters Global Convertible Bond UCITS ETF (Dist).
Marketing Communication. For Professional Client Use Only.
For Investors in Austria: The offering of SPDR ETFs by the Company has been notified to the Financial Markets Authority (FMA) in accordance with section 139 of the Austrian Investment Funds Act. Prospective investors may obtain the current sales Prospectus, the articles of incorporation, the KIID as well as the latest annual and semi-annual report free of charge from State Street Global Advisors GmbH, Brienner Strasse 59, D-80333 Munich. T: +49 (0)89-55878-400. F+49 (0)89-55878-440. Finland: The offering of funds by the Companies has been notified to the Financial Supervision Authority in accordance with Section 127 of the Act on Common Funds (29.1.1999/48) and by virtue of confirmation from the Financial Supervision Authority the Companies may publicly distribute their Shares in Finland. Certain information and documents that the Companies must publish in Ireland pursuant to applicable Irish law are translated into Finnish and are available for Finnish investors by contacting State Street Custodial Services (Ireland) Limited, 78 Sir John Rogerson’s Quay, Dublin 2, Ireland. France: This document does not constitute an offer or request to purchase shares in the Companies. Any subscription for shares shall be ade in accordance with the terms and conditions specified in the complete Prospectuses, the KIID, the addenda as well as the Companies’ Supplements. These documents are available from the Company centralising correspondent: State Street Banque S.A., 23-25 rue Delariviere- Lefoullon, 92064 Paris La Defense Cedex or on the French part of the site spdrs.com. The Companies re undertakings for collective investment in transferable securities (UCITS) governed by Irish law and accredited by the Central Bank of Ireland as a UCITS n accordance with European Regulations. European Directive no. 2014/91/ EU dated 23 July 2014 on UCITS, as amended, established common rules pursuant to the cross-border marketing of UCITS with which they duly comply. This common base does not exclude differentiated implementation. This is why a European UCITS can be sold in France even though its activity does not comply with rules identical to those governing the approval of this type of product in France. The offering of these compartments has been notified to the Autorité des Marchés Financiers (AMF) in accordance with article L214- 2-2 of the French Monetary and Financial Code. Germany: The offering of SPDR ETFs by the Companies has been notified to the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) in accordance with section 312 of the German Investment Act. Prospective investors may obtain the current sales Prospectuses, the articles of incorporation, the KIIDs as well as the latest annual and semiannual report free of charge from State Street Global Advisors GmbH, Brienner Strasse 59, D-80333 Munich. T: +49 (0)89-55878-400.
Ireland: State Street Global Advisors Ireland Limited is regulated by the Central Bank of Ireland. Registered office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered number 145221. T: +353 (0)1 776 3000. F: +353 (0)1 776 3300. Web: ssga.com.
Israel: No action has been taken or will be taken in Israel that would permit a public offering of the Securities or distribution of this sales brochure to the public in Israel. This sales brochure has not been approved by the Israel Securities Authority (the ‘ISA’).
Accordingly, the Securities shall only be sold in Israel to an investor of the type listed in the First Schedule to the Israeli Securities Law, 1978, which has confirmed in writing that it falls within one of the categories listed therein (accompanied by external confirmation where this is required under ISA guidelines), that it is aware of the implications of being considered such an investor and consents thereto, and further that the Securities are being purchased for its own account and not for the purpose of re-sale or distribution.
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Italy: State Street Global Advisors Ireland Limited Milan Branch (Sede Secondaria di Milano) is a branch of State Street Global Advisors Ireland Limited, registered in Ireland with company number 145221, authorised and regulated by the Central Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors Italy is registered in Italy with company number 10495250960 - R.E.A. 2535585 and VAT number 10495250960, and whose office is at Via Ferrante Aporti, 10 - 20125 Milano, Italy. Telephone: (+39) 02 32066 100. Facsimile: (+39) 02 32066 155.
Netherlands: This communication is directed at qualified investors within the meaning of Section 2:72 of the Dutch Financial Markets Supervision Act (Wet op het financieel toezicht) as amended. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. Distribution of this document does not trigger a licence requirement for the Companies or SSGA in the Netherlands and consequently no prudential and conduct of business supervision will be exercised over the Companies or SSGA by the Dutch Central Bank (De Nederlandsche Bank N.V.) and the Dutch Authority for the Financial Markets (Stichting Autoriteit Financiële Markten). The Companies have completed their notification to the Authority Financial Markets in the Netherlands in order to market their shares for sale to the public in the Netherlands and the Companies are, accordingly, investment institutions (beleggingsinstellingen) according to Section 2:72 Dutch Financial Markets Supervision Act of Investment Institutions. Norway: The offering of SPDR ETFs by the Companies has been notified to the Financial Supervisory Authority of Norway (Finanstilsynet) in accordance with applicable Norwegian Securities Funds legislation. By virtue of a confirmation letter from the Financial Supervisory Authority dated 28 March 2013 (16 October 2013 for umbrella II) the Companies may market and sell their shares in Norway.
Spain: State Street Global Advisors SPDR ETFs Europe I and II plc have been authorised for public distribution in Spain and are registered with the Spanish Securities Market Commission (Comisión Nacional del Mercado de Valores) under no.1244 and no.1242. Before investing, investors may obtain a copy of the Prospectus and Key Investor Information Documents, the Marketing Memoranda, the fund rules or instruments of incorporation as well as the annual and semi-annual reports of State Street Global Advisors SPDR ETFs Europe I and II plc from Cecabank, S.A. Alcalá 27, 28014 Madrid (Spain) who is the Spanish Representative, Paying Agent and distributor in Spain or at spdrs.com. The authorised Spanish distributor of State Street Global Advisors SPDR ETFs is available on the website of the Securities Market Commission (Comisión Nacional del Mercado de Valores). Switzerland: The collective investment schemes referred to herein are collective investment schemes under Irish law. Prospective investors may obtain the current sales prospectus, the articles of incorporation, the KIID as well as the latest annual and semi-annual reports free of charge from the Swiss Representative and Paying Agent, State Street Bank International GmbH, Munich, Zurich Branch, Beethovenstrasse 19, 8027 Zurich as well as from the main distributor in Switzerland, State Street Global Advisors AG, Beethovenstrasse 19, 8027 Zurich. Before investing please read the prospectus and the KIID, copies of which can be obtained from the Swiss representative, or at ssga.com. United Kingdom: The Companies are recognised schemes under Section 264 of the Financial Services and Markets Act 2000 (“the Act”) and are directed at ‘professional clients’ in the UK (within the meaning of the rules of the Act) who are deemed both knowledgeable and experienced in matters relating to investments. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. Many of the protections provided by the UK regulatory system do not apply to the operation of the Companies, and compensation will not be available under the UK Financial Services Compensation Scheme.
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State Street Global Advisors SPDR ETFs Europe I & II plc issue SPDR ETFs, and is an open-ended investment company with variable capital having segregated liability between its sub-funds. The Company is organised as an Undertaking for Collective Investments in Transferable Securities (UCITS) under the laws of Ireland and authorised as a UCITS by the Central Bank of Ireland.
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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.
Issuers of convertible securities may not be as financially strong as those issuing securities with higher credit ratings and may be more vulnerable to changes in the economy. Other risks associated with convertible bond investments include: Call risk which is the risk that bond issuers may repay securities with higher coupon or interest rates before the security's maturity date; liquidity risk which is the risk that certain types of investments may not be possible to sell the investment at any particular time or at an acceptable price; and investments in derivatives, which can be more sensitive to sudden fluctuations in interest rates or market prices, potential illiquidity of the markets, as well as potential loss of principal.
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Information related to Mexico
This information does not constitute and is not intended to constitute marketing or an offer of securities and accordingly should not be construed as such. The Funds referenced herein have not been, and will not be, registered under the Mexican Securities Market Law (Ley del Mercado de Valores) and may not be publicly offered or sold in the United Mexican States. Disclosure documentation related to any of the aforementioned Funds may not be distributed publicly in Mexico and shares of the Funds may not be traded in Mexico.
European SPDR ETFs
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US SPDR ETFs
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