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When the Fed announced last month that it would be buying investment grade corporate bonds, it was said to have thrown the kitchen sink at the coronavirus problem. After this latest move, there are holes where the kitchen cabinets used to be.

It has been a positive sign for us that despite lockdowns being enforced in most of the major economies around the world, in the last two weeks several issuers have managed to successfully raise new debt via the primary market.

Q1 2020, or more specifically March 2020, will go down in history as a game changer.

After a period of material weakness in spreads and general market stress, the common ingredient to recent corporate bond spread stability and subsequent strength has been the resurgence of the primary market.

Partner and Portfolio Manager Rob Ford provides an update on UK Mortgages Limited

Q1 2020, or more specifically March 2020, will go down in history as a game changer.

Having started the year with low yields and tight spreads, fixed income markets had the most brutal month I can recall in March and have been repriced in the most aggressive manner imaginable. The dust does appear to have settled and a more balanced market without ‘fire sale’ pressure has returned, so we thought it was worth recapping where we are today and sharing some thoughts for the journey ahead.

As a manager that invests across the full spectrum of fixed income, we are constantly monitoring the relative value of the different opportunity sets that we cover. Given the fast moving prices we have witnessed recently, and with different asset classes and ratings moving at different times, this analysis can become increasingly valuable.

In response to the exceptional circumstances brought about by Covid-19, the Prudential Regulation Authority (PRA) at the Bank of England has written to UK banks asking them to ‘consider’ appropriate action regarding the payment, accrual and vesting of variable remuneration (i.e. bonuses) for senior staff, together with any dividend payments or share buyback plans.

In the last two weeks we’ve looked at how CLOs behaved during the global financial crisis, and we’ve stress tested a current CLO with GFC-like defaults to see where individual tranches would start to take a loss in that scenario. Keeping in mind the rule that the third in any trilogy is usually either the best or the worst, let’s hope this third instalment is more Toy Story 3 than Tokyo Drift.

With central banks and governments pumping huge amounts of funding into their domestic economies, they are obviously very keen that companies act with prudence and look after their surplus cash sparingly, by cutting back on distributions such as dividend payments and any share buyback plans.

At any other time, record issuance and record outflows in US investment grade would each be worthy of attention. Given the havoc COVID-19 has wreaked in recent weeks, it would be tempting to write off these milestones occurring in parallel last week as merely the latest quirk of an unprecedented period for bond markets, but the reasons behind this apparent sentiment split are worth keeping an eye on.