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The first quarter of 2020 marked an unprecedented period in U.S. financial market history across numerous dimensions. The unexpected emergence of a novel coronavirus spreading rapidly throughout the world ultimately caused world governments to implement the most extreme actions by shutting down large portions of the global economy. Air travel, sporting events, group meetings, physical store retailing and cruising were dramatically reduced or completely outlawed by most countries in short order.
As the virus was determined to be highly contagious and likely more fatal than the common flu, countries began mandatory lockdowns and closed borders to slow the spread. Governments then initiated monetary and fiscal stimulus policies designed to stem the economic impacts, as segments of society are not working during the shutdown.
During the first quarter of 2020, the Treasury yield curve shifted downward as investors sought safe haven assets. To combat the economic slowdown caused by the pandemic, the U.S. central bank cut rates twice for a total of 1% in the month of March. As the Federal Funds target rate reached a lower bound of 0%, policymakers indicated their intention to maintain this floor without going into negative territory. Instead, the Fed has restarted another round of quantitative easing, which includes purchase of Treasuries and mortgage-backed securities. Credit spreads widened dramatically during the March panic sell off, however some sectors have since modestly rebounded, in particular defensive sectors with strong balance sheets. For the quarter as a whole, wider spreads led to sharp declines in most corporate bond prices, including hybrid securities and preferred stock.
Despite the black swan events which have occurred so far in this tumultuous year, we remain optimistic about the future. Governments have seen this movie before – as recent as the 2008 credit crisis – and are now rapidly deploying both fiscal and monetary policies designed to stabilize the markets. The credit markets in particular are being targeted for financial support. We underperformed the benchmark in Q1 due to our relatively high weighting in credit versus sovereign (U.S. Treasury) securities but have no regrets. We do not believe that lending money to the increasingly leveraged American government for five years at less than 0.5% is a great bargain. Instead, our core bond positions are paying three to ten times what we would earn by lending to Uncle Sam. As I write this, corporate and ABS prices are already improving. We see a brighter future ahead for our long-term investors.
The information contained in this article is for information purposes only, and represent the views of the author. It is not intended as specific investment or financial advice, or a recommendation or solicitation to buy or sell any security. Any investments or strategies listed in this article may not be suitable for all investors. Past performance is not indicative of future performance, and as with any investment, prices may fluctuate. It is recommended that advice is sought from a qualified investment professional prior to implementing any financial plan. LOM has made every effort to ensure that the contents herein have been compiled from sources believed reliable, however LOM does not warrant the accuracy, adequacy, timeliness, or completeness of this information expressly disclaims liability for errors or omissions in this information.
