- The spreading COVID-19 coronavirus has pushed Treasury yields significantly lower, with the 10‑year note testing historical lows. Meanwhile, investment grade and high yield corporate bond spread widening has been relatively muted.
- Investors should be aware of how their portfolios are positioned as more defensive sectors in the corporate bond market should fare better if the spread of the virus accelerates.
- Yesterday’s swift and significant drop in bond yields is a reminder of the benefits of active management, including holding or adding to securities that can provide downside protection in volatile times.
John Lloyd: Over the weekend, we got worsening news about the spread of the coronavirus as we got cases in Italy and South Korea, after Japan a couple of weeks ago. I think the markets in the last couple of weeks were calmed because the virus seemed to be contained within China. And now with it spreading, investors are really worried about the global growth outlook. We’re seeing that with the S&P and Dow, down almost 3% today [Monday 24 February], as equity investors are worried about the global growth outlook.
We also see that in the Treasury market. The 30‑year hit an all‑time low today and the 10‑year is very close to its all‑time low yield. I think we’re seeing that in the shorter, front end of the curve as well. The market is pricing in almost two interest rate cuts through year end with the Fed now. And it’s really investors buying insurance in case the coronavirus continues to accelerate.
It’s interesting because we haven't seen as big a move in the credit markets. The high yield market and [investment grade] IG markets are off today, but we are still bouncing around near tight levels for both those indices. So, the credit markets still seem a bit complacent, even with the latest news, even though we’re seeing them back up in sympathy with the equity market.
I think the outlook from here really depends on the spread and acceleration of the coronavirus and what that ultimately does for global growth. I think investors have to be cognizant of how portfolios are positioned today. If the virus continues to get worse and global growth does slow, I think the more defensive sectors like health care and utilities will fare better. I also think industries and companies that aren’t as levered to the global growth outlook and trade, global trade as well, will do better in that type of environment.
I think this is a perfect time to remind investors that you can really benefit from active management. In active management, we know the risks in the portfolios. We can position the portfolios for these kinds of events. And we can also have insurance that seeks to protect on the downside and deliver some capital preservation.