Bond Market Update

 In Strategy Updates

Global concerns surrounding COVID-19 and economic uncertainty have caused dramatic volatility in credit markets in recent months. In the beginning of the year, we witnessed a global “flight to safety” in which investors flocked to the safety of U.S. treasuries away from riskier assets. This increase in demand coupled with a lower interest rate environment has caused bond prices to rise and yields to move lower. At one point all U.S. treasury yields across the board were under 1% – for the first time ever!

In March the Federal Reserve (the Fed) took bold and decisive action by slashing interest rates. The Fed Funds rate is now currently set from 0% to 0.25%; down from 1% to 1.25%. This current level matches the record low hit during the 2008 financial crisis. The Fed also launched a massive stimulus plan to purchase $700 billion worth of treasuries and mortgage backed securities.

During last month’s rapid stock market decline, there was a concurrent massive sell-off of corporate and municipal bonds and a large-scale selling-off of fixed income ETFs and mutual funds. This resulted in the market being flooded with more “sells” than there were “buys” causing bond prices to fall and yields to rise. You may have even noticed this price disruption in your own account. The Fed has since stepped in by opening emergency direct-lending programs and expanded its credit program to support corporate and municipal bonds, and even some fixed income ETFs and recently rated “junk” securities. This has stabilized prices in the market and has reduced some of the extreme widening of credit spreads.

Despite these recent market movements, bonds offer great value to your portfolio. They are less volatile than stocks, which serve to buffer your portfolio against broad market declines. Bonds provide stable streams of income and can provide Federal and/or state tax benefits, depending on the type. During periods of lower rates, bonds that have been previously purchased tend to appreciate in value – which adds to their total return. We favor using a bond ladder strategy, which diversifies your portfolio from interest rate risk.

While the true impact from COVID-19 remains unknown for global economies, we anticipate seeing a rise in longer-term rates as outlooks for growth become more optimistic. We believe that the Fed’s swift monetary actions coupled with a massive $2 trillion fiscal stimulus package is very positive for specific parts of the credit market. We expect additional opportunities in both corporate and municipal markets as Congress considers passing a second stimulus bill in addition to the $2 trillion CARES Act. In the meantime we will continue to monitor the market and interest rate cycle to selectively add positions into your bond portfolio as opportunities arise.

We hope this short update finds you well. If you have any questions about your portfolio or bonds specifically, please feel free to contact us.

Your Team at Main Street Research