Page 20 - Investment Outlook

Fixed Interest
Without Fed intervention we may not have seen
the swing back in credit markets.
As equity markets fell so did
bonds, as investors sought the safety of cash and in particular US$. However, both US and UK sovereign bonds cushioned portfolio losses.
The massive and decisive intervention by the US Federal Reserve in March to extend its quantitative easing programme to purchase bonds and other credit gave stability to credit markets and with
that equity markets. The panic sell-off and rush to cash did however cause spreads to widen on both corporate bonds and treasuries.
The US Federal Reserve launched a programme of US$700bn worth of quantitative easing aimed at buying US Treasuries and municipal bonds. On top of this, the Primary Markets Corporate Credit Facility (PMCCF) and Secondary Markets Corporate Support Facility (SMCSF) will result in a further US$200bn
of investment grade corporate bond purchases this year.
The Fed has expanded its bond purchasing programme not only to buy up US Treasury bonds but also investment-grade corporate bonds and high- yielding grade corporate bonds. The Fed helped support the high-yield sub-investment grade bond market by allowing its asset purchase programme
to buy the bonds of so called ‘fallen angels’. Fallen angels are bonds that were recently trading as investment grade bonds but have subsequently been downgraded to the high-yield sector. This has eased of concerns over the liquidity available in the high- yield market to absorb fallen angels with significant amounts of debt.
Despite the QE support, it was noticeable how different forms of bonds behaved through the market downturn. Sovereign debt was able to endure
the reduction in market values, but corporate
debt initially fell, particularly high-yield bonds. High-yielding bonds are more aligned to equity performance and, as would be expected declined the furthest of the credit markets. After the Fed committed capital to these markets, there was a strong swing back that stabilised values.
The comparisons between US Treasuries, UK Gilts, UK Investment Grade Bonds and UK High
ESTATE CAPITAL INVESTMENT OUTLOOK
19 EDITION 33 Summer & Autumn 2020