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LAM Blog Post: Investment Implications of COVID-19
NCPERS hosted a webinar with Lazard Asset Management, “Life on the Other Side of COVID-19” with Ronald Temple. Ron divided the COVID-19 crisis into four parts: healthcare, the economy, policy responses, and investment implications. In this blog, we will breakdown the investment implications.
Fixed Income Markets
In a typical month over the last eight years, U.S. corporations with investment-grade credit ratings issued about $100 billion of debt per month on average..jpg)
LAM Blog Post: Investment Implications of COVID-19
NCPERS hosted a webinar with Lazard Asset Management, “Life on the Other Side of COVID-19” with Ronald Temple. Ron divided the COVID-19 crisis into four parts: healthcare, the economy, policy responses, and investment implications. In this blog, we will breakdown the investment implications.
Fixed Income Markets
In a typical month over the last eight years, U.S. corporations with investment-grade credit ratings issued about $100 billion of debt per month on average. In response to the COVID-19 crisis, these high-quality issuers raced to borrow and build the liquidity, preparing for worst case scenarios. In March, for example, U.S. investment grade corporate debt issuance totaled $261 billion, only to be topped by another record amount of issuance in April at $276 billion.High Yield Markets
High yield markets told the opposite story of investment grade markets. Since 2012, a typical month saw $20 to $25 billion of new high yield issuances. In March, high-yield issuance totaled $3 billion. However, after the Fed announced on April 9th that it would begin buying non-investment grade bonds (as long as the issuer was investment grade as of March 22, 2020, and the issuer was rated no lower than BB-/Ba3) high yield markets reopened with issuance of $37 billion in April. Once investors knew the Fed would support this market for the first time, they rushed to take advantage of high credit spreads and yields by buying lower quality bonds.Ron believes that the Fed was forced to take aggressive measures because of the massive growth in the amount of bonds that were rated BBB, the lowest rung on the investment grade ladder. The amount of corporate bonds outstanding in the U.S. with a BBB credit rating increased 237 percent to $3 trillion from 2009 to the end of 2019. These are the companies that were in danger of being downgraded to junk ratings and becoming “Fallen Angels”. The junk bond market is only $1 trillion. If there were $500 billion of downgrades, hypothetically, it would have been disruptive to corporate America and employment. The Fed's action has significantly decreased this pressure.
In summary, the aggressive monetary stimulus discussed in the previous Policy Response post is fueling the equity markets, forestalling illiquidity, and keeping unemployment from going even higher.
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