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The effect of COVID-19 on the corporate bond market

Investments, Off the Cuff

Posted by Albert Ngo

Apr 14, 2020 3:52:57 PM

Senior Portfolio Manager
Empire Life Investments Inc.
Gestionnaire principal de portefeuille
Placements Empire Vie

Off the Cuff with Albert Ngo

Albert Ngo discusses how the COVID-19 situation has impacted the corporate bond market in this Off the Cuff video.





This is Albert Ngo, senior portfolio manager, Empire Life Investments, with another segment of Off the Cuff video.  First I just want to wish everyone well and I hope that you're managing during these unusual times.

Here, at Empire Life Investments, we're trying to do our part to flatten the curve. The Investment Team is working from home or remotely. Although we're not in the office every day, things are going smoothly. We’re in constant communication and updating each other with ideas and what's going on in our respective markets and portfolios.

With the first quarter now behind us, I would like to take this time to provide an update on what we've been seeing in the corporate bond markets. The first quarter was the most volatile we've seen since the financial crisis, and although the magnitude of the self-off was not as extreme, the pace was roughly two times as fast. In a matter of a couple of weeks, we saw corporate bond spreads go from historic lows to cyclical highs.  It was the type of market where there was really nowhere to hide other than government bonds which did their job of acting as insurance.

During the quarter, government bonds were up while all the other asset classes we invest in were down. Investment-grade corporate bonds were down 3%; high-yield bonds were down 13%; Canadian preferreds were down 25%, and equities were down around 35% with the heaviest losses occurring within a two-week time frame. 

Given the speed and the severity of the sell-off, we’ve been asked if this is a repeat of the financial crisis. I do not believe it is as we are not questioning the solvency or the functioning of the financial system. Instead, in Q1 we had two big external shocks due to the COVID-19 pandemic and the oil price war between Russia and Saudi Arabia. These events triggered a sell-off.  The speed and magnitude of the sell-off was exacerbated by: 1) the growth of fast money such as ETFs and algorithmic trading in credit markets and; 2) the temporary lack of liquidity as many participants rushed in to raise cash at the same time. In a matter of weeks the Fed and other central banks implemented various policies to shore up liquidity.  We've seen an improvement in the functioning of fixed income markets and the ability of companies to access credit. Since testing the lows in corporate bond markets, the market has recovered about one third of those losses. So where does that leave us today?

Going into the year, our corporate bond portfolios were repositioned fairly conservatively given that corporate bond spreads and yields were at historical lows. From here it's impossible to predict the direction of the market in the short term.  Regardless, our process remains the same.  We continue to invest in companies that have sustainable balance sheets or that provide attractive risk-reward at attractive evaluations. As spreads went from historical lows to cyclical highs, we are seeing many attractive entry points to invest in good businesses with strong management teams and balance sheets at valuations we haven't seen since the financial crisis. These types of opportunities don't come along all the time but you can rest assured that we are in a good position to take advantage of them as they arise.



Related articles:

Corporate fixed income update

This document/video includes forward-looking information based on the opinions and views of Empire Life Investments Inc. as of the date published and is subject to change without notice. The information contained herein is for general informational purposes only, and should not be considered a recommendation to buy or sell any security, nor should it be relied upon as investment, tax, or legal advice. Empire Life Investments Inc. and its affiliates assume no responsibility for any reliance on, misuse of, or omission of any information contained in this video, and do not warrant or make any representations regarding the use or the results of the information contained herein in terms of its correctness, accuracy, timeliness, reliability, or otherwise, and do not accept any responsibility for any loss or damage that results from its use. Please seek professional advice before making any investment decisions.

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Empire Life Investments Inc., a wholly owned-subsidiary of The Empire Life Insurance Company, is the Manager of Empire Life Mutual Funds and the Portfolio Manager of Empire Life Segregated Funds issued by The Empire Life Insurance Company.


April 2020