The US has been one of the countries that has been hit hard by the coronavirus outbreak, increasing concerns about the impact the pandemic has on credit markets.
In recent days, US investment grade corporate credit spreads have widened by around 300 basis points (bps), which is “extremely wide and reflecting a severe recession”, Steven Oh, Los Angeles-based global head of credit at Pinebridge Investments, said in a recent webinar organised for clients.
High yield bonds have also “blown out substantially”, with spreads widening at least 1,000 bps, he added.
With investors panicking, the US has acted forcefully. The US Federal Reserve has been buying US treasuries and mortgage debt, as well as giving out loans to the corporate sector, which should help companies access credit, Oh said.
However, he believes that the stimulus actions will not help the US fixed income market rebound.
Instead, the actions provide a floor for downside risk or prevent a breakdown in the financial system, he said.
Emerging markets
Given the current market environment, Oh believes that investors should not chase investments that they believe will outperform. Instead, he suggests investing in the safer parts of the global fixed income market.
“One of the areas that seems to be a little bit of a safe haven is in China and Asia corporate credit,” he said.
“In Asia, we believe that the virus impact is likely to migrate to the southern hemisphere [and outside the region] in the coming months overall.”
Julie Koo, Citi’s head of private bank investment management sales, also believes that Asian credits continue to be a safe haven within fixed income. However, she is advising clients to look at alternatives, such as private debt, private equity and hedge funds.
“Fixed income opportunities will look different this year. We think clients should look to diversify investments into areas uncorrelated with public fixed income markets and where there is return upside,” she said.
In China, Pinebridge’s Oh believes that the spread of the virus appears to have been brought under control, giving him more confidence in relation to the stability of Chinese bonds.
“[Chinese authorities] are tracking every single citizen in the country and they know when anyone is near anybody else that has any type of [coronoavirus] symptoms,” he said.
The firm’s Global Bond Fund, which is managed by Haibo Chen and Roberto Coronado, has the US as one of its largest underweights in the portfolio compared with its benchmark index, the Bloomberg Barclays Global Aggregate Total Return Index, according to the fund factsheet.
On the flipside, Japan has a huge overweight relative to the index.
The fund also has huge overweights in Europe, including hard-hit Italy and Spain. However, Oh was not able to discuss opportunities in the European fixed income market.
The Pinebridge Global Bond Fund
LatAm caution
When asked about Latin America, Oh said that there are opportunities in corporate bonds. However, he continues to be cautious of the region, even if it only has 16,000 confirmed coronavirus cases, compared with 160,000 in the US and 24,000 in Asia-Pacific (ex-China).
“We remain quite cautious in Latin America overall. From a downside scenario standpoint, if the virus spreads in the region, do the governments there have the capability to provide the type of stimulus necessary to help with the economic damage?
“They clearly do not have the type of tools and capabilities that we have in the US or in Europe, so the downside could be much more significant.”
The Pinebridge Global Bond Fund versus its benchmark and sector
