Market Commentary

The Fixed Income Brief: Are Re-Opening Rollbacks Impacting the Economic Rebound?

As COVID-19 continues to surge in the U.S., rollbacks in opening the economy are stifling market expectations. We see investors continue to remain cautious as spreads tighten, the yield curve flattens, and see default rates substantially increase year over year.

Jobless claims rose for the first time since the initial claims at the beginning of the pandemic. Labor data showed jobless claims rose to 1.42 million from 1.30 million last week. A key takeaway from today’s release is that the reopening rollback is definitely impacting the economic rebound. The improvement we observed appears to have stalled. Several regions of the U.S. appear to be backtracking in terms of COVID-19 containment and labor market performance. After months of steady declines, jobless claims remain stuck at over 2 million filings per week.


Spreads keep tightening across major indices

Spreads across major indices are tighter week over week and the Treasury yield curve modestly flattened. Moody’s wrote this week that “an unfolding global recession will rein in Treasury bond yields. As long as the global economy operates below trend, 1.25% (currently at 1.02%) will serve as the upper bound for the 10-year Treasury yield.”

07.26.2020 - Chart 1 - Wow yield curve and spread changes


Energy and healthcare lead the pack this week

Until COVID-19 risks fade, substantially wider credit spreads remain a possibility, however spreads continue to tighten WoW. Energy was the big winner this week as of 07.23.2020, but Friday brought lower oil prices off rising tensions between the US and China. Over the past month, healthcare has been one of the largest winners (tightening 28bps), led by single A names.

As compared to the same time periods in 2019, the worldwide issuance of investment grade corporate bonds grew by 69% in Q2 and by 40% in the first half. 1H20’s issuance of IG bonds from U.S. corporate borrowers skyrocketed by 92.5% to $1.036 trillion. That said, new issuance is expected to be down in July compared to 2019, which is highlighted by a muted new issuance calendar this week.

07.26.2020 - Chart 2 - Spreads by sector for single A rated bonds


07.26.2020 - Chart 3 - Spreads by rating


Only downgrades issued by S&P this week

U.S. rating change activity worsened last week, with S&P only issuing downgrades. The most notable is the downgrade of Wells Fargo to BBB+, who has struggled from having a less robust investment bank trading arm.

07.26.2020 - Chart 4 - S&P downgrades this week


Default rates for high yield continue to soar

June 2020’s U.S. high yield default rate of 7.3% was up from June 2019’s 3.3% and Moody’s expects on average the default rate to jump to 12.3% by 2021’s first quarter. For July, spreads continue to tighten across the spectrum on the back of higher oil prices and a pick-up in the real estate market.

07.26.2020 - Chart 5 - High yield YTW by sub-sector


Muni market also sees yields tightening and default rates increasing

The GOP still hasn’t agreed on the components of its stimulus bill and it will be interesting to see how the muni market is affected by the proposed bill, which is most likely to come out Monday. Initially it looks like the GOP will propose ~$1 trillion in stimulus geared towards unemployment benefits. Yields continued to tighten this week, but default rates are starting to increase, specifically in the high-yield space.

07.26.2020 - Chart 6 - Muni yields by rating and duration


District of Columbia leads new muni issuance

Net issuance is flat on the year, and this week we highlight the District of Columbia new issuance, which tapped four tenors of the market.

07.26.2020 - Chart 7 - Muni new issue summary by rating and duration


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