The volatility across markets has created considerable anxiety amongst investors trying to gauge the effectiveness of the healthcare response + the monetary response + the fiscal response. Given how varied the responses are by region and country, this may be an unsolvable riddle over the near term. As lenders of our clients’ money, we want to own bonds of solvent companies. But as fiduciaries, we can’t buy bonds without knowing the depth of the impending contraction and the response to it.

What signals are we in GFICC looking for to add liquidity to the bond market?

• A further monetary response by central banks. There is more that the central banks can do and should do to keep the markets stable while fiscal policy packages are debated and agreed. Will the Federal Reserve ultimately seek the authority to buy corporate debt? Will the European Central Bank look to expand the size of its asset purchases to better support peripheral sovereign debt and the corporate bond market? How many emerging market central banks will aggressively cut official rates?
• A powerful global fiscal response to backstop aggregate demand in a world devoid of final demand. We need to see programs that get operating cash to businesses affected by the virus. Over the next few months, businesses cannot feel the pressure to cut costs through layoffs. Programs that get cash into the hands of consumers is also very helpful.

How are we investing portfolios?

• We are concentrating in markets that the central banks have indicated they are backstopping. This includes developed and emerging market government bonds, US agency mortgages and some corporate debt in Europe. As volatility and uncertainty remain the norm during the next quarter, it will be critical for the central banks to anchor the markets with their policies.
• It is too soon to add US corporate credit. The market is making broad assumptions on which industries will be restructured and which will fare well through the crisis. Without knowing whether we will see a fiscal package aimed at companies, or broader industries, and whether or not the Federal Reserve will seek to purchase corporate debt – it’s just an educated guess as to what the market has priced in. What is different this time is the size of the private equity and credit markets and it is unknown what the knock-on effect to the public credit markets could be in crisis.
• We are expecting a rebound in risk assets as we hit a bottom and the aggregate policy response starts to gain credibility. We would de-risk further on that bounce in expectation of a return to the lows as the economic reality of a global economic shutdown becomes evident. There will be plenty of time to pick through markets when the adrenaline has faded.

Long story, short…….remain defensive, watch for policy responses, expect further de-risking and unwinding of leverage…and remain patient……there will plenty of buying opportunities over the next couple quarters.