May 2020 / INVESTMENT INSIGHTS
Fixed Income Outlook: Authorities in Crisis Management Mode
Financial markets were hit by four crises in the first quarter
Key Insights
- Financial markets were hit by four crises in the first quarter—public health, economic, liquidity, and energy—with uneven progress made in addressing them.
- We have been encouraged by the measures taken so far, but it’s uncertain whether the 2008 crisis playbook that authorities are following will work this time around.
- We feel that it’s important to be tactical in the current environment and look for opportunities identified by our fundamental research approach to take advantage of any pricing anomalies and dislocations.
In the first quarter of 2020, we quickly moved from a potential reflation scenario to a full recession environment as four separate, but related, crises hit financial markets: public health, economic, liquidity, and energy. The events were extraordinary and unlike anything seen in modern times. In response, almost all developed governments unveiled large fiscal stimulus packages, while major central banks announced significant monetary easing programmes. We have been encouraged by the measures taken so far, but it’s uncertain whether the 2008 crisis playbook that authorities are following will work this time around.
Uneven Progress in Addressing Crises
Looking into more detail at the four issues, progress has been made in some areas but not all. With respect to liquidity, the U.S. Federal Reserve’s measures have helped to improve conditions, although it may take time before markets are fully functioning again. On the energy front, the Organization of the Petroleum Exporting Countries (OPEC) reached an agreement to cut output in April, which is a promising step, but some doubts linger about whether it will be enough.
From a public health perspective, uncertainty continues, as coronavirus cases have yet to peak and countries at different stages of the outbreak. Even when the top is reached, we are still in unchartered territory as it’s unlikely a vaccine will be ready for some time. On the economic front, various stimulus measures will be supportive for the recovery, but much remains uncertain. For risk markets, this could result in a volatile recovery that follows a W-shape, where a rebound is closely followed by another downturn.
Following a Trusted Investment Process
Overall, we feel that it’s important to be tactical in the current environment and look for opportunities identified by our fundamental research approach to take advantage of any pricing anomalies and dislocations. We will continue to follow our trusted investment process and strive to maintain a portfolio that strikes a balance between country, duration, and yield curve positioning to take advantage of relative value opportunities globally, while also managing downside risks.
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May 2020 / INVESTMENT INSIGHTS
Arif Husain is head of International Fixed Income at T. Rowe Price. He is lead portfolio manager for the Dynamic Global and Global Aggregate Bond Strategies.
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