Gene Tannuzzo , Columbia Threadneedle Investments deputy director of fixed income , analyzed the impact of Covid-19 on fixed income markets and the possible opportunities in this sector: “If we observe the evolution of the financial markets during 2020, the The element that stands out is certainly the strong volatility recorded on all the markets, in particular the bond markets, in the first quarter of the year.
At the end of March, when the financial markets were grappling with the effects of the virus that forced economic activity worldwide, we witnessed a level of volatility on the credit markets comparable to that of 2008 and 2009. The Tax and monetary authorities have reacted very energetically to this wave of volatility.
Governments have certainly done a great deal to mitigate the repercussions suffered by consumers and businesses. In addition, central banks have introduced huge volumes of liquidity on the capital markets, keeping under control not only the risk-free rate, but in many cases also the credit risk premium, even going so far as to buy corporate bonds and other types of securities fixed income.
These measures have had very positive consequences as regards the stabilization of markets and liquidity, while the consolidation effects on fundamentals, which in many countries are still in a somewhat difficult situation, will inevitably be gradual. Take for example the United States, where 22 million jobs went up in smoke by the end of April, then recovered only minimally.
The economic dislocation is therefore significant. At the same time, however, the dimensions of the political response appear truly remarkable. According to our forecasts, in fact, central banks will close 2020 having injected about 6,000 billion dollars on financial markets in support of economies. After the 2008 crisis, however, the overall figure had stopped at around 3,000 billion. The scale of the policy response is therefore considerable and, in this context, risk-free interest rates have fallen close to zero or, in some cases, even below. For example, on the German government bond market, interest rates on ten-year bonds have been anchored below 1% for over five years. In the U.S., they just fell below this threshold,
The question we must ask ourselves at this point is the following: what is better to do in a situation with interest rates that remain low? For our part, we believe there are opportunities to be seized outside of sovereign markets, especially in corporate credit. In terms of risk-adjusted return, we see the best opportunities in the investment grade market, where issuers with solid liquidity profiles are available that can overcome the current turbulence and where we can count on the financial support of central banks that continue to act as support pillar on global markets.
The high yield market has less clear dynamics and, in our opinion, is more affected by the effects on the economy caused worldwide by the pandemic, so much so that our internal forecast of the default rate for this sector is 8.5% in 2020 and an additional 5% in 2021. If we are right, this means that just over 13% of high yield companies could go bankrupt in the next two years, compared to 4-5% of the long-term average. In such a context, the increase in non-performing cases makes the role of credit research absolutely crucial. Although the high yield market offers opportunities on both sides of the Atlantic, both in Europe and the United States,
In addition to the corporate securities market, another area that we consider very interesting in the current context is that of structured products, in particular commercial mortgage-backed securities. These bonds, which are guaranteed by commercial assets such as hotels, offices or retail outlets, are facing serious difficulties at the moment, just think of how many tenants are struggling to pay the rent. Nonetheless, we believe that there are opportunities to be seized in cases where the asset value of the asset that guarantees the obligation is considerably higher than the debt burden: in this context, it is possible to identify opportunities with a still very attractive price.
Finally, emerging markets can offer favorable conditions, going to choose higher quality economies with central banks and tax authorities capable of supporting and limiting the economic burden. In these cases, I think an investment can be interesting; however, as in the case of high yield, we expect high levels of financial suffering and potentially default, therefore the medium-high quality segment of the market is the one where we see the best opportunities.
If we take a step back, therefore, we can see how high the economic stress is and how exceptional the monetary support measures adopted are. Considering that these conditions add a context characterized by the persistence of reduced interest rates, we believe that fundamental credit research will play a very important role and we also believe that the market offers added value opportunities for customer portfolios, despite the worldwide low interest rates. “
- A proposito di Columbia Threadneedle Investments* Columbia Threadneedle Investments is a group specializing in the leading asset management business at a global level which stands out for its wide range of actively managed strategies and multiple investment solutions for individual, institutional and corporate clients worldwide. With the help of over 2,000 collaborators including more than 450 investment professionals operating in North America, Europe and Asia, the Group manages assets of EUR 388 billion which covers shares in developed and emerging markets, fixed income, solutions multi-asset and alternative instruments. Columbia Threadneedle Investments is the global asset management company that is part of Ameriprise Financial, Inc. (NYSE: AMP), one of the main US groups for offering financial services. As part of Ameriprise, Columbia Threadneedle therefore benefits from the support of a large, financially diversified and adequately capitalized leading company. (all data as of March 31, 2020).