'We hear the warnings but it sure feels like a recovery'

Fixed-income expert says robust response has been uneven but high-grade momentum is spilling over into other areas

'We hear the warnings but it sure feels like a recovery'

Amid the warnings of a second wave and further volatility, one fixed income expert has emerged from the trenches to declare: “This sure feels like a recovery”.

The Pender Corporate Bond Fund gained 3.6% in May, continuing to rebound from the COVID-related drawdown as North American credit markets benefited from the Bank of Canada and U.S. Federal Reserve making good on their promises to purchase a variety of credit securities and ETFs. The recovery in oil prices also drove improved sentiment for credit in the resource sector.

Geoff Castle, fund manager, said the recovery in bond markets has thus far been robust, if unevenly distributed, pointing out the U.S. BBB Rated Index’s effective yield to maturity, after spiking to as high as 5.6% on March 23, closed the month of May just over 3%, which is approximately the same level as at the beginning of the year. Government bonds, meanwhile, were helped in no small way by limitless central bank interventions. “Our view is that ‘high grade’ has recovered,” he said.

Single-B credits ended May at an effective yield of 7.09%, which represents a significant improvement from over 12% at the peak of the crisis but is still about two yield points wider than in early 2020. CCC and below index has scarcely recovered at all. In a nutshell, the recovery in deeply discounted credits is at a much earlier stage but from a overall perspective, Castle believes the picture is starting to look brighter.

“We read things. We know many experts are warning about an inevitable second wave of the virus and they also suggest markets may retest levels touched earlier this year,” he said.

“But we are also traders. We know what it is like to be bidding for bonds in this market. Where bond buying in the middle of March felt like the priceline.com ‘name your price’ feature, recent days in the higher end of the bond market have been more like doll shopping during Cabbage Patch mania of the 80s. A ‘lift-a-thon’ some of the brokers call it. Will this pass quickly? Perhaps. But judging by the limited amount of Congressionally authorized ‘ammunition’ that the Fed has deployed to date, our sense is that high grade may continue to tighten.”

Castle believes such momentum in the higher-rated tiers has begun to spill over to the lower tiers and less liquid corners of credit markets.

He said: “Anyone who remembers the seemingly miraculous recovery of the Greek and Spanish markets from the PIGS crisis of 2012 would recognize what is going on in North American wide spread credit today. Deals are getting done. Bids are appearing in names that were bereft of interest for months. We promise, we haven’t abandoned our discipline, but it sure feels like a recovery.”