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WEEKLY FIXED INCOME UPDATE

For the week of March 30, 2020

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CHART OF THE WEEK: HIGH YIELD SPREADS HAVE ALREADY PRICED IN A SEVERE DEFAULT OUTCOME

In the U.S. high yield bond market, of the 10 largest one-day spread widening moves that have occurred since the inception of the benchmark high yield index—the ICE BofA U.S. High Yield Constrained Index—four have happened in a ten-day period ended March 19, 2020. As a result, the average index spread widened from a low of 338 basis points (bps) as of mid-January to nearly 1100 bps as of March 23 before ending the week at around 900 bps.

In the Chart of the Week, we compare a spread of 900 basis points with previous default cycles, showing that the levels of defaults implied by this spread has not occurred in previous recessions (implied cumulative default analysis assumes 5 year term and 30% recovery).

WEEK IN REVIEW

Policymakers have responded to the economic crisis triggered by the COVID-19 virus with unprecedented alacrity. The U.S. Federal Reserve (Fed) introduced unprecedented monetary stimulus, cutting rates to near zero and implementing QE very aggressively, almost immediately, and has maintained USD liquidity by enlarging  and extending swap facilities and standing ready to offer unlimited funding via repo transactions.

Meanwhile, Congress has passed a massive fiscal support and stimulus package that targets households and businesses, and supplies the capital backstop needed for even more aggressive actions by the Fed. The urgency behind these dramatic actions is driven by the unprecedented deterioration in economic conditions reflected in the historic rise in jobless claims reported last week and the week prior.

Investment grade corporates continued to trade tighter last week and a wave of supply continues to be absorbed by the market, with over $100 billion in new issuance on the week. Energy is the notable exception, with WTI Crude down substantially again in the last week, and many investment grade and high yield energy credits down several points.

CMBS marks have been volatile lately, reflecting liquidity and fundamental concerns about property values and near term lease payments. The highest quality tranches have tightened in the last several days while "A" quality and below remain at their widest levels.

ABS has also widened substantially on increased risk to the consumer and the use of the asset class by money managers as a source of liquidity. Some fundamental concern around consumer loans is warranted, given reported and potential unemployment, but the size and scope of the stimulus package should mitigate many of these concerns in the near term.

THE WEEK AHEAD

Tuesday
Consumer Confidence

Wednesday
ISM Manufacturing Index

Thursday
International Trade, Jobless Claims

Friday
Employment Situation





   

Index Returns

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1 Week YTD 1-YR 3-YR 5-YR
U.S. Aggregate 2.65 2.67 8.26 4.64 3.29
IG Corporates 5.33 -4.44 3.56 3.69 3.03
HY Corporates 5.38 -14.36 -8.51 0.41 2.41
Bank Loans 2.42 -15.56 -11.88 -1.58 0.67
IG Corporates 1-3 Year 2.14 -2.38 0.97 1.92 1.81
Global Aggregate 3.17 -0.25 4.04 3.38 2.57





   
   
      
      

TREASURY RATES

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Latest 1-YR Low 1-YR High 1-WK Change YTD Change 1-YR Change
2 Year 0.24 0.24 2.41 -7 -133 -196
5 Year 0.39 0.39 2.41 -6 -130 -176
10 Year 0.67 0.67 2.59 -17 -124 -169
30 Year 1.26 1.12 2.99 -15 -113 -155





   
   
      
      

CREDIT SPREADS

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Latest 1-YR Low 1-YR High 1-WK Change YTD Change 1-YR Change
IG Corporates 295 93 373 -68 202 176
HY Corporates 921 315 1100 -92 585 519
EM Aggregate 649 278 720 -31 348 353
CMBS 234 60 260 42 162 166
MBS 41 32 115 -74 2 9
ABS 318 27 325 92 274 280





   
      
      

OTHER INDICATORS

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Latest 1-WK Change YTD Change 1-YR Change
S&P GSCI 261.54 -0.05 -174.68 -173.20
Crude Oil - WTI ($) 21.51 -0.92 -39.55 -37.90
Trade Weighted Dollar* 128.01 0.00 -0.60 0.98
5-Yr Breakeven Inflation Rate (%) 0.62 0.29 -1.07 -1.12

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