Knowledge. Shared Blog

March 2020

Election Insights: Super Tuesday Split

Following the split outcome of the Super Tuesday Democratic primaries, financial markets will likely focus on the more pressing risks related to the COVID-19 coronavirus. John Kerschner, Head of U.S. Securitized Products, explains why, as Treasury yields fall, investors may want to consider rotating into areas where they can find more attractive risk-adjusted yields.

Key Takeaways

  • Former Vice President Joe Biden’s success in the Super Tuesday Democratic primaries clouded the election outlook. With no clear front-runner in what is now a two-person race, the candidate may not be known until the Democratic convention.
  • Thus, in the near term, financial markets are more likely to focus on the COVID-19 coronavirus and the Federal Reserve’s inter-meeting rate cut in response to the outbreak.
  • Bond markets are pricing in a worst-case scenario for COVID-19 – more so than equity markets. As Treasury yields fall, we think investors may need to look for income in high-grade corporate bonds and mortgage-backed securities.

View Transcript

John Kerschner: Today is Wednesday, the day after Super Tuesday, and what we saw last night was somewhat of a surprise. Joe Biden actually took 10 of the 14 states, pretty much all across the South. But [he] actually won Texas, which was another surprise, and won Minnesota after Amy Klobuchar dropped out. Bernie Sanders did much better in the West – one of the biggest surprises of the night, which was California, and also Colorado.

What this means is that there’s no definitive winner in the primary thus far. We heard that Michael Bloomberg actually dropped out today, so it’s basically between Joe Biden and Bernie Sanders. Elizabeth Warren is still in the race, but most people expect her to drop out relatively soon. So, what we have looking forward is, there’s another primary with Michigan in one week and then in a week after that, on March 17, we actually have a very big day with Florida, Ohio and Illinois.

To secure the nomination, you need 1,901 delegates. It doesn’t look right now, if you just project what happened last night going forward, that either of those two candidates will actually be able to attain that many delegates by the convention in mid-July in Milwaukee. Politics is never a boring game, it seems. So, we expect to have a very interesting convention. There hasn’t been a contested convention, actually, since 1952. So, I think a lot of people are very interested to see what’s going to happen at the convention and see how it plays out.

The election last night, while it didn’t really solidify who the candidate is going to be and there is a lot more uncertainty, the markets aren’t really focused on the election so much right now. They’re much more focused on what’s going on with the coronavirus. That is a much bigger deal because it is here and now, whereas the election isn’t until November, and it’s getting worse or better by the day.

We’re getting a lot of calls about what’s going on with the markets, what’s going on with fixed income in general. I don’t think last night really changes the overall landscape for fixed income that much. Much more, this coronavirus, COVID-19, has changed things because what we’ve seen is the bond market, even more so than the stock market, is pricing in a worst-case scenario. The 10-year Treasury is down over 90 basis points (bps) from when the news all started breaking, which is a massive move, and we saw the 10-year Treasury actually go below 1% for the first time. The Fed cut rates 50 bps inter-meeting. They very rarely do that. And normally, once they cut inter-meeting, they cut at the meeting after that, so we’re expecting another 50-bps cut in just two weeks when the Fed meets again. This is the Fed trying to get ahead of the problem.

As far as investors are concerned, I would say, don’t do anything rash, wait to see how this plays out. But when you look at the market, the overall fixed income indices aren’t giving you very much yield at all. So, if you owned Treasuries before, it’s probably time to start looking to rotate out of those into portfolios where you can get extra yield, whether it’s in mortgages, if you want to stay very safe, or even something like corporate bonds or other higher yielding securities. Because what we’ve seen in this move is, actually, a lot of spread product – ABS [asset-backed securities], corporate bonds, high yield – have widened out quite a bit. So, whereas Treasury yields are very low, actually the overall yield of some of these other sectors where you can add value actually are wider and that means more yield to the investor. What a lot of people don’t realize is the U.S. Aggregate fixed income index is 40% Treasuries, and the yield on that has gone down to 1.57% as of this morning. So, very safe in general. It does have some corporate bonds, but in general, very safe but now very, very low yielding.

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