Loomis Sayles’ Core Plus Fixed Income Team Talks Volatility and Managing Through the Cycle

On Thursday, March 12, Rick Raczkowski, co-lead portfolio manager of Core Plus Fixed Income participated in a conference call with clients to discuss recent events and market activity. He discussed that while there is a lot of fear and uncertainty in the market right now, he and co-lead portfolio manager Peter Palfrey are maintaining their discipline of managing through the cycle as they have for the past 20 years.

The market

Three shocks combined to hit the markets hard: a supply shock from China, a demand shock from the effects of COVID-19, and the energy shock caused by the price war between Saudi Arabia and Russia. We are expecting a pretty negative environment and are starting to see that being priced in the marketplace.

Last year, credit markets were doing well based on the assumption the economy was going to be okay. Now the credit markets are saying the economy is not okay and there's a lot of concern. We've seen some pretty dramatic moves and we've also seen a big reduction in trading liquidity. Our director of US rates trading, Michael Gladchun, says the past few sessions have been worse than 2008 in terms of trading Treasurys. That's very unusual in the market. So I think the markets have just been gripped by the fear of the impact on the economy.

The Fed

(Post-call update: on Sunday, March 15, the Federal Reserve cut the target range for the federal funds rate to 0.00% – 0.25% and announced a formal quantitative easing (QE) program. We welcome this necessary, quick reaction.)

The Fed had an emergency cut (March 3) and we expect to see another pretty aggressive cut. We think the Fed will probably wait until the March 18 meeting. While it could be sooner, it won’t be later. Right now the market is pricing in a full four cuts by the end of the year and we think those will be front-loaded. The Fed also announced that it was going to expand its $60 billion Treasury bill purchase program, which had been ongoing, to buy coupons in the broader Treasury sector and the entire coupon stack. We consider this QE 4. There have also been repo operations to try to create liquidity in the market. We believe the Fed is going to be aggressive. When it sees Treasury liquidity start to deteriorate, that really gets it to take notice.