Global corporate bonds have made a significant recovery since the height of the crisis experienced in the first quarter of the year. Do you feel this rally was justified and is it sustainable?

2020 has certainly been a very volatile year marked by an extreme and very rapid spread widening in the first quarter of the year, which reached a peak on 23 March as fears concerning the coronavirus took hold. Liquidity dried up and credit markets essentially ceased functioning. But the ensuing rally was equally remarkable in both its magnitude and speed. Spreads have now recovered from most of their widening and are only currently around 12 basis points wider than their trough going into the crisis. By comparison it took the best part of a year to only recover about 70% of the sell-off following the global financial crisis in 2008. ¹

Much of the recovery this year has been due to the unprecedented nature and scale of central bank and government stimulus measures. This recovery is not necessarily truly reflective of underlying fundamentals which, to some extent, remain challenged in many industries and geographies.

There has, however, been positive news recently as companies such as Pfizer and Moderna announcing COVID-19 vaccines. A lot of uncertainty remains, at least over the next six to 12 months – it is still unclear how long a rollout could take and the vaccines’ ultimate efficacy. Over a longer term two-year view, I am very optimistic. But new waves of the pandemic continue to wreak havoc, from a health perspective, economically and in terms of general investment sentiment.

The backstopping of industries and employment with a variety of government schemes and flooding of the financial system with additional liquidity all fully justified the rally, but for technical reasons rather than fundamental ones. I continue to take comfort in the fact that central banks will keep doing whatever it takes to keep markets functioning, through measures that are likely to support spread levels. From that perspective the rally is also sustainable. What is more uncertain in my view is the amount and pace of fiscal support that will continue to be provided. I believe it is likely to wane, particularly if a successful vaccine roll-out gathers pace.

To summarise, I believe that current spread levels are sustainable but would expect more volatility going forward as these competing dynamics unfold. For that reason I am broadly neutral credit risk and more focused on idiosyncratic opportunities at both an issuer and issue level. Selectivity and deep fundamental credit research remain critical.

 

In your opinion how impactful has the intervention of central banks been?

The intervention of central banks around the world proved to be a very effective tool in helping to unfreeze markets, and also provided both direct and indirect support to markets. In addition, this gave investors the confidence that, should additional stimulus measures be required, they would be there to act promptly to counteract any potential repeat of the spread widening and volatility we experienced earlier this year.

 

1. As at 26 November 2020. Trough on 20 January 2020 as measured by the option-adjusted spread for the Bloomberg Barclays Global Aggregate Corporate Index. Source: Bloomberg

 

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