If the flattening virus curve is what lured buyers back to global markets, then it’s central bankers who are telling them where to go.
Treasuries. Investment-grade debt. Fallen angels. Bond ETFs.
Jerome Powell and his peers have drawn a road map for recession-be-damned traders to ride the market rebound. And the investing world is losing no time getting onboard -- including the biggest asset manager of them all.
“We will follow the Fed and other DM central banks by purchasing what they’re purchasing, and assets that rhyme with those,” Rick Rieder, head of BlackRock Inc.’s global allocation team, said in a blog post this week.
The biggest monetary put in history is giving the some $7 trillion fund manager bullish conviction as it sells interest-rate volatility and buys long-duration bonds, while cushioning the economic downturn with a hefty cash position.
Allocation plans like these are being adopted from London, Geneva to New York, belying the prolonged virus-spurred lockdown and the reversal in the credit cycle.
Whether the opportunity to front-run stimulus has already passed is fast becoming the question.
Fed's balance sheet is surging as it hoovers up assets
“The stimulus seems to be endless,” said Dirk Thiels, head of investment management at KBC Asset Management in Brussels. “Buy what the central bank has been buying and in the short-term it’ll be a good strategy.”
He’s turned neutral on fixed income from underweight on expectations rates will stay low for longer.
To date, the U.S. central bank alone has announced crisis facilities that could ultimately total more than $10 trillion across multiple asset classes. It’s chosen BlackRock to shepherd several debt buying programs on its behalf.
In the latest development, U.S. policy makers stunned investors last week with a plan to buy companies recently downgraded to junk and exchange-traded funds which may include riskier bonds. All told, the Fed has about $750 billion of purchasing power to bring to the corporate bond market, according to calculations by Citigroup Inc.
“We have decided to increase the credit side of our allocation because the support is mainly in the credit market,” said Francois Savary, Geneva-based chief investment officer at Prime Partners SA, which oversees 4 billion Swiss francs ($4.2 billion). “It’s clearly on that side that they really want to see a reduction in spreads to continue and to accelerate because it’s essential to avoid bankruptcies.”
Biggest high-yield bond ETF has been notching inflows
BCA Research is among firms touting a simple credit strategy off the back of Fed and European Central Bank actions. This week it recommended investors stay overweight U.S. investment-grade debt with maturities of less than five years, which is a limit for the Fed’s buying program. It also reckons Italian debt is a better bet than core European equivalents.
How long rebounding markets can defy economic gravity via palliative monetary medicine is unclear. And for that reason Charlie Diebel at Mediolanum International Funds Ltd. in Dublin is treading carefully.
“You can follow the Fed to some degree, but you have to have a relatively high level of conviction in the underlying story of that company because we don’t know how long or protracted the downturn is going to be,” said the firm’s head of fixed income.
Mediolanum has high-yield exposure but Diebel is snubbing it in his absolute return bond fund because the length of the economic slowdown remains unclear and the default rate unknown.
Bearish wagers against the largest junk-bond ETF have been building as skepticism grows that Fed support will be enough to fully protect investors, and flows into credit markets overall are far from flashing bullish fever.
Yet the cash market is fast recovering from last month’s mayhem with spreads for U.S. corporate debt tumbling after hitting the widest since the financial crisis.
U.S. credit spreads are rapidly retreating after a spike
“The opportunity in the corporate bond market is already well telegraphed,” said Gregory Perdon, chief investment officer at Arbuthnot Latham Co & Ltd. in London.
Perdon prefers to ride the Fed interventions by acquiring shares in U.S. Agency Mortgage REITs. “The Fed wants, needs, demands a properly functioning mortgage market,” he said.
The home loan market was at the center of the crisis in 2008, and is coming under pressure again as the extent of the economic damage from the virus becomes clear.
Bad news keeps piling up.
The International Monetary Fund said on Tuesday the “Great Lockdown” recession would be the steepest in almost a century. The worst-case scenarios for U.S. employment are fast becoming a reality, with a surge in the jobless rate to 20% possible as soon as this month. At one point rating agencies were downgrading the creditworthiness of companies at the fastest rate in more than a decade.
“Just because the Fed is buying it doesn’t mean you’ve got to buy it too,” Diebel at Mediolanum said. “The fact that the Fed or a central bank is supporting something doesn’t necessarily mean it’s going to perform well.”
—Bloomberg News provided this article.
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