Government Bond of the Year – Germany 4 ¾% due 7/4/34. Who ever said negative yielding bonds result in negative returns? This bond entered 2020 with a yield of -0.04%. Although its lowest yield in March was at -0.80%, today’s yield of -0.56% has still managed to generate a total return of +5.8%. It’s a win-win, right? Through the miracle of Modern Monetary Theory (MMT), governments get to fund themselves at no cost (actually, a profit) and investors still earn a pretty generous risk-free return. What can go wrong!?
Runner-up: Mexico Sustainable-Linked 7 year EUR bond – the first ever sovereign bond issued under ICMA Sustainable Bond Principles mapping the use of proceeds to UN Sustainable Development Goals with embedded impact reporting. It’s a peek at the future of debt funding.
Corporate Bond of the Year – Morgan Stanley 5.597% due 3/24/51. Courageously, this bond was issued during the peak of the crisis in March. Whoever was brave enough to buy it at the new issue price of 100 is now sitting on a bond that trades at over 160. Thank you, Federal Reserve (Fed). Thank you, U.S. Treasury. Thank you, 13(3) facility.
Runner-up: Carnival 6.65% due 1/15/28. Cruise lines were at the center of the virus and the impact from the shutdowns. The bonds, which were trading at a high of 127.5 pre-crisis, plunged to a low of 71 in early April before recovering to 102 today. Facing a liquidity crisis, the company (like many others in the high yield market) issued secured debt in March and then a series of liens, equity and unsecured debt to help it bridge the gap until the world starts cruising again.
Central Bank of the Year – European Central Bank (ECB). Sure, the Federal Reserve was majestic shock and awe. But the ECB never really had any chance to normalize its balance sheet or official rate after the financial crisis, so it went into this crisis with ostensibly no remaining tools. But it played a blinder. After slipping on a strand of pasta and throwing Italian debt into a death spiral, the ECB moved with speed and force to backstop the markets … cutting rates and expanding its balance sheet. Most importantly, the Recovery Fund/Common Fiscal Capacity should be a transformative legacy from the crisis. In the words of Winston Churchill (and Rahm Emanuel in 2008), “Never let a good crisis go to waste.”
Runner-up: Bank Indonesia (BI). We need to acknowledge the role emerging market central banks played in the recovery. The BI cut policy rates by 1.25% and successfully navigated Quantitative Ease (QE) through a “one-off” monetization of government debt by buying more than 3% of GDP in its local market bonds.
Central Banker of the Year – Jay Powell and Steve Mnuchin. It’s a tie! The Fed was so fast, aggressive and innovative it left Congress in the dust. But could the Fed have been so effective without the assistance of the Treasury? No chance. The Federal Reserve Act limits the Fed to buying only government debt … but clearly, businesses and households were the ones in real need. Use of the 13(3) facilities allowed Mnuchin to get funding from Congress, which acted as equity capital that the Fed then leveraged up to create a safety net across all government, business and household funding. Now, the trillion-dollar question: Are these just temporary tools, or do they become a permanent part of central bank tool kits?
Runner-up: Janet Yellen. We missed her but got an early holiday present with her appointment as U.S. Treasury secretary. Long live MMT!
Currency of the Year – Bitcoin. The conditions were right for a liquid, electronic and anonymous currency. Bitcoin is up almost 200% this year, suggesting that cryptocurrencies are here to stay and will likely evolve.
Runner-up: U.S. Dollar. We should mention a traditional, dirty paper currency: The USD retained its status as the place to be when everything goes wrong, like in March. But 2021 will likely see the end of the USD exceptionalism and is likely to feature emerging market currencies as a go-to.
Comeback Player of the Year – China. China came into 2020 with a lot of challenges: the trade war with the U.S., significant tariffs and ground zero for the virus. But a severe health care policy response, significant monetary accommodation and meaningful fiscal support have led to a reemergence of the economy. We now estimate full-year GDP at +2.3% for 2020 and +8.2% in 2021. Perhaps the path of the China recovery serves as a road map for other economies as they reopen … things can return to something approximating normal sooner than later.
Runner-up: Copper. Ahhhh, Dr. Copper … don’t economic shutdowns and deep recessions mean a collapse in commodity prices? After dropping 24% at the start of the year, copper is on track for a 30%-plus gain. It’s an ominous reflationary signal of what a vaccine-led global reopening could be like.
Villain in a Leading Role – COVID-19. Something so ruthless and borderless did lead to, by necessity, global collaboration and cooperation. For sure, vaccine development in less than a year shows what can be achieved with modern medicine and technology. And the combination of monetary ease with fiscal stimulus led to the mainstream acceptance of MMT (even if only temporarily). It remains to be seen what economic scarring will remain after the reopening. But we now know that coordinated policy responses can be sufficient to bridge the gap to recovery.
Runner-up: This award is vacated. Nothing else merits mention.
Unsung Hero – U.S. Convertible Bond Market. How crazy is it to find a bond market that generated a higher return in 2020 than the NASDAQ? Although the NASDAQ is up around 39% year-to-date, the Bloomberg Barclays US Convertibles Composite is up over 40%. Once yields plunged and equities rocketed higher, many were questioning the merits of the traditional 60/40 stock-bond mix. Could bonds provide any hedge to equity volatility or any upside for returns? Jan Loeys of our own CIB wrote a seminal piece on adding hybrid securities to the mix while dialing down the stock and bond weightings. Converts were a key part of his equation, and they are off to a fast start.
Runner-up: Subprime Auto Securitizations. As March unfolded, models of unemployment approaching 20% suggested that consumer-oriented loans should be impaired … with subprime borrowers being the riskiest of loans. Our securitized investors told me not to fret. The loans supporting our securitizations were well originated by entities they knew, the deals were well structured, and the credit enhancements were significant. As the CARES Act was rolled out, supplemental unemployment benefits and stimulus checks allowed consumers to pay down debts, the deals continued to perform well. I was wrong, the team was right … and our clients benefited. I’ll eat that humble pie any day.
Rookie of the Year – Modern Monetary Theory (MMT). It’s incredible to us how fiscal support enabled by central bank purchases has become so widely accepted. What a change from the Global Financial Crisis, when fiscal austerity was the generally accepted policy to balance budgets after a downturn. That never made sense to us. How does a country shrink its spending in an attempt to grow its way out of a crisis? The challenge with MMT going forward will be, where does a country draw the line? How much borrowing and spending is too much? How do governments resist the moral hazard of canceling the sovereign debt held at their central bank?
Runner-up: Emerging Market QE. So effective in Indonesia, so problematic in Turkey and so dangerous if not carefully handled. Let’s see if/how it is reversed a few years from now.
Most Valuable Player – ESG. We want to end on a positive note. Sustainable investing is rapidly becoming mainstream. Whether it’s the Mexico debt issuance or the mandates we are seeing from our clients, bond market investors want to know who they are extending credit to. They want those borrowers to have the same values they hold for environmental, social and governance issues. Diversity and inclusion (D&I) is emerging rapidly as a funding consideration in this space. Are borrowers considering all stakeholders in their decisions, and do these decisions represent not only the diversity of the entity but the broader population? ESG will shape the future of lending and have a material socioeconomic impact … it’s about time!
Each year, J.P. Morgan Asset Management makes a satirical list of bond market awards, it is meant for entertainment purposes only. As an asset manager, J.P. Morgan Asset Management does not provide investment advice. As such, the information above should not be construed as investment advice or a recommendation to buy or sell a security.
As of the date of publication, JPM holds position(s) of the above mentioned securities in one or more account(s)
The views contained herein are not to be taken as an advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice.