Governments around the world have taken drastic measures to dampen the negative economic impact from the COVID-19 pandemic. This is the right thing to do since without support from more government spending, tax relief and loan guarantees, many companies would have to shut down and this would be a drag on recovery and lead to the loss of jobs. Income support for low income families and the unemployed are also necessary to sustain their standard of living.

Yet, these measures are not cheap. U.S. Federal support on businesses and households has come to USD 2.4trillion (tn), or 11.8% of Gross Domestic Product. Many of these measures were one-off or temporary. They are set to expire in the coming weeks. There is a clear need for another round of fiscal support for the economy. The economy has passed the worst of its recession. 7.5 million jobs have been recovered with the jobless rate falling to 11.1% in June from the peak of 14.7% in April. However, the glass is far from half full, since the 7.5 million jobs created were only one-third of the 22.1 million payroll jobs lost between February and April.

The number of new infections has risen in the U.S. Its 5-day moving average breached 50,000 last week. A number of states have paused or even rolled back reopening processes. This is likely to delay the economic recovery in the U.S., which would be a test for companies to survive.

The Senate is currently in recess until July 17. It will be in session for three weeks before another recess begins on August 10. There are disagreements on the measures involved. For example, Republicans are not in favor of keeping the extra USD 600 per week in unemployment benefits. They believe that this would discourage people to seek work and instead prefer a ‘back-to-work’ bonus for those who are able to find work. Nonetheless, we could see further stimulus packages eventually coming through in the next few weeks and perhaps before the end of year, adding potentially another USD 1-2tn in fiscal deficit for the current fiscal year. With the presidential and congressional elections in four months, both parties would want to gain voters’ support with stimulus packages. 

EXHIBIT 1: global fixed income: yields and risks

Source: Barclays, Bloomberg Finance L.P., FactSet, ICE BofA Merrill Lynch, J.P. Morgan Economics Research, MSCI, J.P. Morgan Asset Management.
Based on Bloomberg Barclays U.S. Treasury (UST) Bellwether 2y & 10y (2y & 10y UST), Bloomberg Barclays Treasury Inflation-Protected Securities (TIPS), ICE BofAML Country Government (1-10y) (France, Germany, Japan & UK (1-10y)), Bloomberg Barclays U.S. Aggregate, Credit – Investment Grade & High Yield (U.S. Aggregate, IG & HY), Bloomberg Barclays U.S. Floating Rate (U.S. Floating Rate), Bloomberg Barclays U.S. Aggregate Securitized – Mortgage-Backed Securities (U.S. MBS), Bloomberg Barclays Pan-European High Yield (Europe HY), J.P. Morgan GBI-EM Global (Local EMD), J.P. Morgan EMBI Global (USD EMD), J.P. Morgan Asia Credit (JACI) (USD Asia Credit), J.P. Morgan Asia Credit (JACI) – High Yield (USD Asia HY), J.P. Morgan Asia Credit China Index (USD China offshore credit), J.P. Morgan CEMBI (USD EMD corporates), J.P. Morgan Asia Diversified (JADE) (Local Asia). *Correlations are based on 10-years of monthly returns.
Guide to the Markets – Asia. Data reflect most recently available as of 30/06/20.

Investment implications

Overall, we believe that the U.S. government has few choices but to extend fiscal support to businesses and households in the coming weeks. This would be supportive to risk assets, even though fiscal policy cannot fully offset the pandemic’s damage. We also see the Federal Reserve (Fed) being supportive and staying engaged in asset purchases to prevent a surge in government bond yields, especially towards the shorter end of the yield curve. This implies that risk free rates are likely to stay low for an extended period of time.

The problem with 10-year U.S. Treasury yields at 0.7% is that it has become quite expensive to protect investors against equity market corrections. This could persuade investors to consider high grade corporate debt to generate some income but with low correlations with equities (Exhibit 1). The fact that the Fed and some major central banks are buying high grade corporate debt adds to its appeal. Asian local currency debt also has similar characteristics of low correlation with equities and the ability to generate income. However, investors may want to partially hedge the currency risk in case the U.S. dollar strengthens in a risk-off environment. 

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