Portfolio Manager John Lloyd discusses today’s large moves in many fixed income markets due to heightened coronavirus concerns and outlines strategies that may improve capital preservation amid the volatility.

Key Takeaways

• The spreading COVID-19 coronavirus has pushed Treasury yields significantly lower, with the 10-year note testing historical lows¹. 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.
• Today’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.

View Transcript

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 last couple weeks were calmed down because it 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 as equity investors are worried about the global growth outlook².

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 yield¹. I think we’re seeing that in the shorter, front end of the curve as well. You’re seeing the Fed … the market’s pricing in almost two 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 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 protect on the downside and protect with capital preservation.

Notes:
1. Source: Bloomberg, Global Safety Rush Sends U.S. Yields Plunging Toward Record Lows, 24 February 2020 (https://www.bloomberg.com/news/articles/2020-02-24/treasury-10-year-yields-drop-to-2016-lows-with-virus-spreading)

2. Source: Bloomberg, Stocks Drop Most Since February 2018; Havens Gain: Markets Wrap, 24 February 2020 (https://www.bloomberg.com/news/articles/2020-02-23/aussie-drops-with-traders-cautious-on-virus-woes-markets-wrap)

Unless otherwise indicated, the source for all data is Janus Henderson Investors as of 24 February 2020.