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Bond Market Review | May 4, 2020

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Bond Market Review | May 4, 2020 Bond Market Review | May 4, 2020 Summary Treasury Yields Its wa another solid week for the bond market as the spread sectors and Treasury yields • Treasury Term ∆ MTD ∆ YTD rallied. Accommodative commentary from the Fed and the European Central Bank (ECB) Yield and continued flattening of the virus curve provided the positive catalyst. 1 Year • Munis lagged Treasuries for a second consecutive week although crossover taxable buyers 0.16 0.02 -1.41 entered the tax-free market Thursday to take advantage of the corporate-like yields. 2 Year 0.19 -0.01 -1.38 • Corporate spreads have stabilized at the current elevated levels after moving significantly 5 Year 0.35 -0.01 -1.34 tighter for the month of April. However, most of the tightening occurred in the first two weeks of the month and we’ve been moving sideways since. 10 Year 0.61 -0.03 -1.31 • The market continues to differentiate between credits although we are beginning to see 30 Year 1.25 -0.04 -1.14 investor demand for lower quality bonds Tax-Exempt • After two weeks of relentless price cuts that saw 10-year AAA municipal yields backup 35+ basis points (bps), buyers returned to the secondary market in force on Friday to reach for bonds up and down the yield curve. Although activity slowed by midday with many offerings priced rich or removed altogether ahead of the weekend, gains remained strong to close out the week. • While the McConnell bankruptcy talk has faded, there is potential weakness to deal with in the near-term. Several large, lower quality issuers are expected to tap the new issue market in the next week or two, such as the state of Illinois (Baa3/BBB-), Great Lakes Water (Detroit) taxable (A1/AA-), and NY MTA (A-). • S&P focused on the Higher Ed sector last week revising the outlooks for many smaller private colleges and regional public universities to negative. This approach gives the rating agency the ability to downgrade once the financial data arrives. Moody’s concentrated on the transportation sector issuing credit comments on a variety of systems across the U.S., but mostly just affirmed their existing ratings. • The Fed announced changes to the municipal lending facility (MLF) after receiving feedback from a variety of stakeholders. Counties and cities with population levels of 500K and 250K, respectively, are now eligible to access the Fed’s program directly. Other municipalities are expected to ask their respective state for an allotment of the funding their state will receive. The Fed will also extend the maturity limit on their bond purchases from two-year to three-year maturities. Municipal Yields Tax-Equivalent Municipal/Treasury Term Municipal Yield ∆ MTD ∆ YTD ∆ MTD ∆ YTD Yield Ratio (%) 1 Year 0.77 -0.04 -0.27 1.18 481.55 -88.47 415.14 2 Year 0.87 -0.04 -0.17 1.34 457.89 -7.34 391.61 5 Year 1.04 -0.05 -0.05 1.60 297.40 -3.37 232.94 10 Year 1.35 -0.11 -0.09 2.08 220.66 -7.71 145.56 30 Year 2.16 -0.12 0.07 3.32 172.99 -4.47 85.53 Taxable • Despite another massive week of supply, investment grade credit had a relatively stable week ending three bps tighter to 206 bps. Positive news on the coronavirus and more states tentatively reopening along with the dovish Fed message was enough to overcome what are becoming more unfavorable technicals. • With $90 billion in supply last week, the monthly record for investment grade issuance was broken for the second month in a row. Boeing brought a hefty deal, printing $25 billion in bonds. We are now 80% ahead of last year’s gross issuance pace with May estimates for another big month. Volume was 20-30% above average, driven by the heavy new issuance. • The pace of corporate downgrades seemed to slow last week, although Fitch now has the entire universe of financials on negative outlook. • dEnergy ha a great week, ending 13 bps tighter after oil prices rallied from Monday's lows. In high yield, energy tightened 166 bps on the week. Investors may be starting to look at the economy reopening, which will drive demand for fuel higher. Several companies have also reported production curtailments, improving the outlook for supply/demand when the demand side of the equation picks up. Even on days when oil was lower this week, energy bonds seemed well-bid and many beaten up energy bonds were up multiple points this week. Front month West Texas Intermediate (WTI) futures are still low but are approaching $20/b for the first time since the middle of April. As of 05.01.2020. Sources: Bloomberg, Barclays Capital, Bank of America Merrill Lynch. Please see page 3 for important disclosures and definitions. 1175379 - 1 FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR USE WITH CLIENTS OR THE PUBLIC Bond Market Review | May 4, 2020 Sectors1 52-Week Duration Spread ∆ MTD ∆ YTD 52- Week High Low Investment Grade Corporate 8.37 206 4 113 373 93 -Financial 6.41 206 3 126 378 80 -Industrial 8.99 211 4 112 383 99 -Utility 11.10 170 2 73 298 95 High Yield 3.93 745 1 409 1100 315 Securitized 1.64 52 1 10 135 38 -Commercial Mortgage-Backed Securities 5.33 171 -1 99 260 60 -Asset-Backed Securities 2.11 156 -3 112 325 27 -Mortgage-Backed Securities 1.34 41 2 2 132 28 International Yields Germany Japan U.K. France Italy Spain Greece 2 Year -0.76 -0.14 0.04 -0.62 0.60 -0.22 -- 5 Year -0.76 -0.14 0.10 -0.47 1.13 0.04 1.71 10 Year -0.59 -0.02 0.25 -0.11 1.76 0.72 2.17 30 Year -0.18 0.45 0.60 0.59 2.61 1.46 -- Equity Volatility Commodities Current ∆ MTD ∆ YTD Current ∆ MTD ∆ YTD Current ∆ MTD ∆ YTD Dow Jones 23,723.69 -622.03 -4814.75 VIX 37.19 3.04 23.41 CRB 117.63 0.43 -68.16 S&P 500 2,830.71 -81.72 -400.07 MOVE 48.11 -5.48 -10.17 Gold 1,700.90 6.70 177.80 Nasdaq 8,604.95 -284.60 -367.66 Oil 19.78 0.94 -41.28 Gas 76.63 -1.74 -92.42 Central Bank Rates Currency Current ∆ MTD ∆ YTD Current ∆ MTD ∆ YTD United States 0.25 0.00 -1.50 US Dollar 99.079 0.063 2.634 Europe 0.00 0.00 0.00 Euro 1.098 0.003 -0.023 United Kingdom 0.10 0.00 -0.65 Pound 1.251 -0.009 -0.075 Japan 0.10 0.00 0.00 Yen 106.910 -0.270 -1.850 Canada 0.25 0.00 -1.50 Canadian Dollar 1.409 0.014 0.110 TED Spread 44.2 -16.61 7.70 Franc 0.961 -0.004 -0.006 As of 05.01.2020. Source: Bloomberg. Please see page 3 for important disclosures and definitions. 1Sectors are represented by the following indices: Investment Grade Corporate – Bloomberg Barclays U.S. Corporate Bond; Financial – Bloomberg Barclays U.S. Aggregate Investment Grade Finance; Industrial – Bloomberg Barclays U.S. Aggregate Investment Grade Industrial; Utility – Bloomberg Barclays U.S. Investment Grade Utility; High Yield – Bloomberg Barclays U.S. Corporate High Yield; Securitized – Bloomberg Barclays U.S. Securitized; Commercial Mortgage-Backed Securities – Bloomberg Barclays U.S. Aggregate CMBS; Asset-Backed Securities – Bloomberg Barclays U.S. Aggregate ABS; Mortgage-Backed Securities – Bloomberg Barclays U.S. Aggregate MBS. 1175379 - 1 FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR USE WITH CLIENTS OR THE PUBLIC Bond Market Review | May 4, 2020 Technical Terms Duration: a measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates Municipal/Treasury Ratio: a comparison of the current yield of municipal bonds to U.S. Treasuries Tax-Equivalent Yield: the return that is required on a taxable investment to make it equal to the return on a tax-exempt investment TED Spread: the difference between the three-month Treasury bill and the three-month LIBOR based in US dollars Yield: the earnings generated and realized on an investment over a particular period of time Yield Spread: the difference between the quoted rates of return between two different investment vehicles; also called the credit spread Index Definitions The volatility of an index varies greatly; all indices are unmanaged and investments cannot be made directly in an index. Bloomberg Barclays US Aggregate ABS Index:A component of the Bloomberg Barclays US Aggregate Index, the Bloomberg Barclays US Aggregate ABS Index includes pass- through, bullet and controlled amortization structures. The Index includes only the senior class of each ABS issue and the ERISA-eligible B and C tranche. Bloomberg Barclays US Aggregate CMBS Index:A component of the Bloomberg Barclays US Aggregate Index, the Bloomberg Barclays US Aggregate CMBS Index includes investment grade securities that are ERISA-eligible under the underwriter’s exemption. Bloomberg Barclays US Aggregate MBS Index:A component of the Bloomberg Barclays US Aggregate Index, the Bloomberg Barclays US Aggregate MBS Index covers the mortgage-backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA) and Freddie Mac (FHLMC). The Index is formed by grouping the universe of over 600,000 individual fixed rate MBS pools into approximately 3,500 generic aggregates. Bloomberg Barclays US Aggregate Investment Grade Finance Index:A component of the Bloomberg Barclays US Corporate Bond Index, the Bloomberg Barclays US Aggregate Investment Grade Finance Index measures publicly issued investment grade US corporate bonds in the Finance sector.
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