Monday Musings: October 26, 2020

Oct 26, 2020

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Public Trust Credit Team
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Global virus numbers continue to tick higher, roiling equity markets while credit markets remain relatively unscathed

Global COVID-19 cases topped 43.1 million yesterday; in the U.S., daily new cases continued to climb but remained below the record of daily new cases set last week on Thursday and Friday. This acceleration in global cases shows that the world is not yet out of the woods when it comes to the pandemic. In the U.S., some cities and counties have rolled back reopening measures with areas like Riverside County in California closing indoor dining and El Paso, Texas issuing the first stay-at-home recommendation since the early pandemic. Rising case numbers continue to keep the market focused on the prospect of new stimulus, which now appears to be a post-election item, and how companies are faring as Q3 earnings continue to be reported this week. Equity markets remain volatile on the news flow while U.S. IG spreads remain tight, with the short end of corporate spreads tightening over the last month and some market strategists projecting more tightening through the end of the year. As debt markets continue to shrug off COVID-19 news, all eyes will likely be on the election and the stimulus talks that should happen afterward.

Consumer and corporate creditworthiness holding up better than expected

Significantly fewer speculative-grade U.S. corporate issuers are defaulting on their debt compared to what many investors had anticipated at the onset of the COVID-19 crisis. According to Moody’s Investors Service, the trailing 12-month default rate for U.S. corporate issuers of speculative-grade bonds and loans at the end of September was 8.5%, below the 8.7% mark registered in August and substantially lower than Moody’s 11.2% forecast in April. For context, the speculative-grade default rate reached as high as 14.7% during the 2008/2009 financial crisis. Defaults have now slowed for a third consecutive month and in large part have been better contained by years of low interest rates and unprecedented actions taken by Congress and the Fed. While the trend is a welcome sign for the labor market and could potentially signal a faster economic recovery, leverage levels are likely to remain elevated with debt/EBITDA equal to 6.1x for the average high-yield bond issuer.
 
Consumer balance sheets are also showing optimistic trends with some of the largest U.S. credit card lenders pleasantly surprised by the low level of write-offs and delinquencies. U.S. card companies Capital One Financial Corp. and American Express Co. are expecting a significant increase in marketing spend for new customer acquisitions this holiday season. In an article recently published by Bloomberg L.P., Capital One CEO Richard Fairbank stated “this is the biggest disconnect that I certainly have experienced in my three decades of building Capital One between what we see in the economy itself and the actual performance of the consumer.” As gathered by the Federal Reserve Bank of St. Louis, the U.S. delinquency rate on credit card loans stood at just 2.42% in Q2 2020, the lowest level since Q1 2017.
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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