Monday Musings: April 27, 2020

Apr 27, 2020


Public Trust Credit Team
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Fiscal stimulus, economic data, and the upcoming Fed meeting

Last week, the latest $484 billion stimulus package passed Congress and was signed by President Trump on Friday, April 24. Some of the most notable items of the package include $310 billion to replenish the already depleted Small Business Administration’s Paycheck Protection Program, $60 billion for the Economic Injury Disaster Loan Program, $75 billion to support hospitals and healthcare providers, and $25 billion to expand COVID-19 testing. This week will bring its fair share of economic data, notably a first read of the Q1 2020 GDP, inflation, and ISM manufacturing data. The Federal Open Market Committee meeting will convene on Tuesday and Wednesday and will offer the market additional color on what to expect on monetary policy front.

The dollar is still king for now

Even with a strong rally in spreads throughout April, U.S. credit still appears to be appealing; USD-hedged, investment grade bond spreads continue to be more attractive than their Euro counterparts. Based on commentary from the Japanese life insurers who started their fiscal year March 31, we expect foreign buyers to step up purchases of U.S. debt and continue to tighten spreads.

Businesses aren’t defaulting... yet

According to S&P, $64.1 billion of debt was defaulted on during the last 12 months ended April 17, 2020. This represents only a slight uptick from the pre-COVID-19 run rate with the most recent data suggesting that revolver draw-downs are only at 29% of capacity. However, S&P expects the default rate could spike to “dot-com bust levels” in its base case or, in its worst case scenario, as bad as the highs seen during the Global Financial Crisis. Investors in the lower end of the junk-rated universe and those in the industries most affected by the shutdowns should be bracing for an uptick in defaults. At Public Trust, we continue to leverage our fundamental approach to analyze our bank counterparties to ensure they remain strong and can weather a possible surge in defaults from affected industries.

New Zealand and China reported significant wins in the battle to contain the COVID-19 outbreak while U.S. states start to prepare for reopening

New Zealand announced a vital win on Monday with only one new case of COVID-19 reported as Prime Minister Jacinda Ardern successfully declared that “there is no widespread, undetected community transmission in New Zealand.” This is a significant win in the battle to contain COVID-19 for a nation of approximately five million people. In addition to tough border restrictions at the onset of the crisis, New Zealand has enforced strict measures with its lockdown approach including closing non-essential businesses, canceling events, and closing schools nationwide. Additionally, the epicenter of the pandemic in China, Wuhan, has reported that the city released all remaining COVID-19 patients this past Sunday, a major victory for the industrial metropolis of approximately 10 million people. 
As global cases approach the three million mark with one million of those cases in the U.S., some states have started to ease restrictions such Alaska, Colorado, Georgia, Mississippi, Montana, Oklahoma, South Carolina, and Tennessee. These states have started partially reopening their economies that have essentially been shut down by the pandemic, but this may prove to be a delicate task as citizens work to navigate stay-at-home orders by their respective local, county, and state governments including any conflicting orders that may arise.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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