“Weeks Where Decades Happen”
The first quarter of 2020 was figuratively one of those “weeks where decades happen,” to quote the popular Vladimir Lenin phrase. The 30-year Treasury began the quarter with a yield of 2.39%. Despite this low starting yield, the quarterly return on the 30-year Treasury was a gain of 24.5%. Yields dipped as low as 0.70% at one point before finishing at 1.32%. The 10-year Treasury closed the quarter at 0.67%, and the rest of the curve sits even lower.

Investment grade corporate bonds would experience their worst monthly performance since the index began a little more than two decades ago. They experienced two consecutive weeks of losses that were more than double any two-week period during the financial crisis of 2008-2009. Relative to treasuries, investment grade corporate bonds ended the quarter down more than 10%, and at one point this was more than 17% before a rally ensued to end the quarter.

The Federal Reserve (Fed) lowered interest rates by 50 basis points on March 3 to a range of 1.0 – 1.25%. History would prove foretelling, as a 50 basis points emergency cut would not be the final action taken, nor have much effect in stemming the decline in economic momentum. By the end of the month, the Fed would engage in another emergency rate cut of 100 basis points and take the federal funds rate to the zero bound. The Fed would go from restarting quantitative easing (QE) to a commitment of unlimited QE. The increase in the Fed balance sheet in just the last week is almost equivalent to the entire reduction that took place over two years. The annualized growth rate in the balance sheet for the month of March is greater than 1000%. On top of this, the Fed created many facilities to help support every aspect of markets. The Fed supported certain aspects of the money markets, opened swap lines to foreign central banks, began buying high-quality, short-term municipal bonds, and ended with a work around enabling them to buy corporate bond exchange-traded funds.

Outlook and Positioning
The fall in economic output is unprecedented whether one looks at initial jobless claims restaurant sales, or chemical activity. It should come as no surprise given the directives from government agencies. Regardless of what the economy looked like in January, we now face one where job losses beget a reduction in spending and self-sustaining negative feedback loops. Eventually this should end, but the narrative that a peak in virus cases is all that is necessary for a V-shaped recovery seem misplaced. Therefore, the portfolios are targeting a duration around neutral and potential overweight depending on risk/reward set-ups as we move forward.

Corporate bond exposure was reduced prior to the fall, which aided in performance. We added some high quality corporate bonds that were very cheap during the market dislocation and now look to reduce exposure to underperforming, BBB-rated names. We have reduced exposure toward a neutral rating on corporate bonds in recent days following the bounce. We anticipate this could become an underweight, but as always, we will continue to follow the indicators in our process. The portfolio also benefited from owning shorter corporate bonds, which produced better returns despite the wider move in spreads. This is driven by lower spread risk. An overweight to BBB-rated bonds hurt performance as they were especially weak in the second half of the month. Another deterrent was the performance of energy-infrastructure corporate bonds.

Source: BTC Capital Management, Bloomberg LP, Ibbotson Associates, FactSet.
The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.

The information within this document is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and you should not interpret the statement in this report as investment, tax, legal, and/or financial planning advice. All investments involved risk, including the possible loss of principal. Investments are not FDIC insured and may lose value.