Sticking the Landing
It is somewhat unsurprising the humble Midwest town of Des Moines, Iowa, is a hotbed for gymnastics, having been the development and training ground for some of the sport’s top athletes. High scores take hard work, focus and reaching a series of goals to achieve success. But in the end, it is all about sticking the landing. Over the last six months policy makers have “stuck the landing” with their unleashing of a monetary and fiscal response to the economic impact from the coronavirus pandemic that has lifted markets, supported companies and assisted households to help turn one of fastest downturns into one of the fastest rebounds. Yet even as markets rebound, the economic measures traditionally relied upon are sending mixed signals regarding sustainability. Corporate headcount cuts, increased leverage and rising nonperforming bank loans reflect the uneven sharing in the economy that the recovery in asset prices fails to reflect.
Buyer of Last Resort
Looking forward we see markets highly influenced by forthcoming news covered in our lead article. Bond markets will see much of the same in the fourth quarter as the third. The Federal Reserve has “stuck the landing,” pushing down and stabilizing borrowing rates so much that a metric used to measure fixed income volatility has reached a historic low. Low stable lending rates have been the cornerstone upon which asset prices have recovered. Year-to-date the broader bond market is up 6.8% as central banks turned from lender of last resort to buyer of last resort in the second quarter, buying up a wide range of asset types to boost bond prices and lower interest cost. After a robust second quarter of new monetary programs and declining rates, central bankers let off the accelerator, putting monetary policy on cruise control holding the balance sheet steady, its traditional pre-election stand-down. Policymakers turned their efforts back to the traditional jawboning of markets, releasing forecasts showing their plan to keep the short-term borrowing rate at 0.25% until 2023.
While most of this year’s bond market performance followed the unloading of the Fed’s monetary policy barrage in the second quarter, third quarter broad bond market measures still advanced 0.6%. Improved corporate bond prices advanced the benchmark, while treasury returns were relatively unchanged.
Who Would Want That Job?
No matter who wins a local election they will face fiscal challenges as local sales and usage taxes have fallen below budget expectations. To fill the gap, municipalities have turned to issuing debt, taking advantage of low rates to add new, and refinance older, more-expensive debt. Municipal bond returns at 3.2% year-to-date trailed taxable market returns on investor concerns about a heavy supply of new issues and lower tax collections. Returning 1.2% during the quarter, this slower-responding sector advanced ahead of taxable bond markets on positive news about future tax collections resulting from rising home prices.
With elections approaching, fixed income markets should remain stable as investors look beyond the quarter for how fiscal policy developments help or hinder future growth. Ready to step in again to stabilize markets are monetary policymakers with new rounds of asset buying if markets falter. Let’s just hope when needed they can stick another landing.
Source: BTC Capital Management, Bloomberg LP, Ibbotson Associates, FactSet.
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