The market is finally waking up to the prospects of not just viral contagion from coronavirus, but also to financial and geopolitical contagion. Now the contagion is spreading rapidly into the credit markets where not only energy bonds are plunging but other sectors like airlines, lodging, and retail are sure to follow suit. Then there is the knock-on effect to corporate earnings and cash flows across a broad swath of industries once the world enters a global recession which now appears to be inevitable. We
The market is waking up to not just the viral contagion of coronavirus, but also to financial, economic, and geopolitical contagion.
by Scott Minerd, Guggenheim Partners
arrive at this moment with the overleveraged corporate sector about to face the prospect that new-issue bond markets may seize up, as they did last week, and that even seemingly sound companies will find credit expensive or difficult to obtain. Credit spreads have a long way to expand. BBB bonds could easily reach a spread of 400 basis points over Treasurys while high yield would follow suit with BB bonds at 750 basis points over and single B bonds at 1,100 basis points over. The risk is that it could be worse. As for stocks, technical analysis suggests that there should be support around 2,600 on the S&P 500, but in a recession scenario a level closer to 2,000 could be the ultimate outcome.
by R. Scott Richardson, JD, CLU, ChFC Founder & CEO IZALE Financial Group
The only silver lining is that you should have some gains in the bond portfolio. But now what? Unless you have a robust loan pipeline, where do you go with maturing bonds or to invest the cash from loan payments?
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By Scott Minerd, Chairman of Investments and Global CIO
We are trying to buy as many high-quality longer-duration assets as possible at reasonable yields to help lengthen duration in the face of potentially lower rates, but 3 percent is becoming a difficult yield to reach. We are selectively adding to BB credits which we think are “money good” to certain accounts to enhance yield. Eventually, we may have an opportunity to add more risk assets to our client portfolios as economic growth slows around the world and corporate borrowers default. The chances of recession are rising rapidly, for which we are well positioned.
IZALE Financial Group
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