March 10, 2020 | By Hank Cunningham
Fixed income investors have gone through a dramatic turn of events. Government yields in North America have plunged and are approaching zero. At the same time, corporate credit markets have witnessed a significant widening of bond yields. High yield energy bonds, in particular, have been battered.
Central banks everywhere have loosened monetary policy again. As they do not have much left in the way of ammunition, the focus has shifted to fiscal stimulus. Several countries have announced, or are about to announce, such stimulus in an attempt to stabilize their economies and fend off a recession. Substantial fiscal stimulus will provide some cushion as will sharply lower energy prices. In the meantime, there is no evidence of Covid-19 peaking and thus, economic activity will be constrained.
Wider yield spreads for corporate bonds, both investment-grade and high yield, will be a feature of the markets in the near future. The spread for investment-grade corporate bonds has already blown out to 200 basis points over U.S. Treasury notes. Some pundits believe this could widen further, to 400 basis points.