Over the weekend COVID-19 (coronavirus) became significantly more widespread on a global basis. Italy quarantined several large cities and the state of preparedness in the United States continues to face scrutiny. This put equities in a position of weakness that would become worse as the weekend progressed. Friday saw oil prices plunge 10% as Russia failed to agree with OPEC members regarding a supply cut. It was the largest drop in prices since 2014. Oil prices as of this writing are down about 20% today, which would be the biggest drop since 1991.
Global fixed income yields have set records on the speed and magnitude of decline. The big eye-opener is the U.S. 30-year Treasury, which has seen its yield fall 37% from Thursday’s close. This would be more than double the previous two-day rate of change record set in 2008. Despite yields near record lows to start the year, the 30-year Treasury has fallen 74 basis points in just over a week and this would be the largest absolute drop over this timeframe since the market crash in 1987.
With oil prices dropping 20% in one day and more than 50% in two months combined, with one of the largest demand shocks via a global pandemic, it’s no surprise inflation expectations would fall. Sharply falling inflation expectations, anticipation for the Federal Reserve to take rates back to zero, and few AAA-rated securities creates a potent cocktail for Treasury bonds to perform well.
Attention is now focused on the corporate bond market, which is starting to crack in recent days. Certainly, the high yield sector is at risk with its exposure to energy names. High-yield energy bonds are down 5-30% today and even investment grade names are seeing drops of 10-20%. These are big moves for corporate bonds, especially when yields are dropping and creating a tailwind to the price. Non-energy investment grade corporate bonds have seen their spreads versus Treasuries more than double in just over a week.
The market currently anticipates the Federal Reserve will cut the Fed Funds rate another 50 basis points this month. Currently, the entire Treasury curve is below 1% for the first time ever, and real yields are deeply into negative territory.
In terms of asset allocation, we have no commitment to the high-yield sector and our emphasis on quality and duration positioning in our proprietary strategies is proving to be beneficial in the current market environment.
Contributed by | Justin Carley, CFA, Managing Director
Justin is a Managing Director, providing portfolio management and credit analysis for fixed income strategies. He also manages the firm’s multi-manager portfolio strategies and contributes to the asset allocation framework. Justin has more than 10 years of experience focusing on management, analysis and trading of fixed income portfolios. Previously, Justin was a fixed income portfolio manager at American Trust & Savings Bank. Justin has a bachelor’s degree from Truman State University, holds the Chartered Financial Analyst designation and holds a Fellowship in the Life Insurance Management Institute.
Source: BTC Capital Management, Bloomberg LP, Ibbotson Associates, FactSet.
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