Credit the Recovery

Looking back on the first six months of fixed income performance this year reveals a stark tale of two strikingly different quarters. While first quarter performance was dominated by COVID-19-driven fund flows out of risk assets and into the safety of U.S. Treasuries, the second quarter was a story of recovery across the fixed income landscape, largely driven by historic policy support from both central banks and fiscal authorities. While a broad index of U.S. Treasury bonds held its own and was essentially flat during the second quarter, investment grade corporate bonds rebounded from distressed levels to stage their greatest quarterly gain of the last 10 years.

The support programs announced by the Federal Reserve at the end of March and their immediate impact on corporate borrowing cannot be overstated. Companies experiencing or fearful of liquidity constraints because of the economic shutdown now had the central bank in their corner, lowering borrowing costs and even promising to be the buyer of last resort for their corporate debt. This supportive dynamic has led to record corporate debt issuance year-to-date. Corporate borrowers are adding financial flexibility as they evaluate both the pace of recovery and specific effects on their business.

The heightened volatility across fixed income asset classes around the turn of the quarter allowed us to review our strategic allocations in clients’ taxable bond portfolios. We began the year with an overweight allocation to U.S. Treasuries as we did not view the additional yield, or spread, of corporate bonds to be sufficient compensation for the added credit risk inherent to these securities. As Treasuries became historically expensive, offering record low yields to investors, the relative value and additional yield of corporate bonds became much more attractive. Based on this shift in relative valuations, we executed a pivot intra-quarter selling Treasuries and purchasing corporate bonds with attractive additional yield in a strategic shift from being underweight to now overweight Credit.

The deepest U.S. recession since World War II remains on track to also be the shortest. We have already seen notable rebounds as we work through the early portion of our anticipated checkmark recovery. As we begin this new economic cycle and with continued signs of improvement across the economy, we believe our recent shift to add credit exposure to client portfolios will increase their return profile as well as provide additional income in this current low-rate environment.

Our Takeaways from the Week

• Despite the recent increase in daily reported coronavirus cases, the S&P 500 still managed to close +1.75 percent for the week

• Mortgage rates continue to fall. Bankrate’s 30-year fixed national average declined again this week to 3.18 percent while their 15-year fixed average declined to 2.71 percent

Disclosure

The views expressed represent the opinion of Ferguson Wellman. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Statements of future expectations, estimates, projections and other forward-looking statements are based on available information and Ferguson Wellman’s views as of the time of these statements. Past performance may not be indicative of future results. Ferguson Wellman, Octavia Group and West Bearing do not provide tax, legal, insurance or medical advice. This material has been prepared for general educational purposes only and not as a substitute for qualified counsel who can determine how this information applies to you. We believe the information provided is from reliable sources but should not be assumed accurate or complete.

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