A key economic impact of the Covid-19 pandemic is the heightened near-term probability of U.S. and global recession. Investors appear to be pricing this new reality into financial markets. It is most visible for us in the unusually volatile equity market selloff. In the fixed income markets, which primarily trade over-the-counter rather than on exchanges, the ongoing repricing of credit risk has been accompanied by a significant decline in liquidity.
In order to fulfill its mandate of promoting maximum employment, stable pricing and moderate long-term interest rates, the Federal Reserve needs U.S. fixed income markets to fully function with sufficient liquidity to act as a transmission mechanism for monetary policy. For this reason, in recent days the U.S. central bank directly intervened to attempt to restore proper market functioning. It began by offering secured lending against Treasury bills, and it then escalated into $700 billion of direct purchases of Treasury and agency mortgage-backed securities, and most recently it also purchased three-month commercial paper from highly-rated issuers, with up to $10 billion of credit losses to be covered by the U.S. Treasury. We believe these efforts will likely continue, with additional expansions if necessary, until liquidity returns to the fixed income markets.
Our management of the Current Income Portfolio (“CIP”) is affected by the present lack of liquidity in the investment-grade corporate fixed income market. We believe bid-ask levels are not reliable at this time of historical dislocation. As the Federal Reserve’s actions propagate across fixed income markets, we expect liquidity will return, with corporate bonds repricing to incorporate a higher level of credit risk, consistent with a heightened probability of a recession in the wake of the pandemic.
Our approach to purchasing and selling investment grade corporate bonds within CIP is to evaluate transactions individually. We will generally seek to trade only when the price reflects option-adjusted spreads that are consistent with historical levels and in our view appropriate for the individual corporate credit profile and security structure.
Historically there have been other episodes of credit market dislocations following rapid changes in the economic outlook, with market liquidity returning once investors gain comfort that the environment is properly incorporated into security prices. We expect this time will prove no different.
This information is intended solely to report on investment strategies and opportunities identified by Roosevelt. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Please contact us at 646-452-6700 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions, or if you would like to request a copy of our Code of Ethics. Our current disclosure statement is set forth on our Form ADV Part II, available for your review upon request, and on our website, www.rooseveltinvestments.com.
Past performance is not a guarantee of future results. Indices are unmanaged and cannot accommodate direct investment. Themes assigned as per Roosevelt Investments’ evaluation. Risk tools may include cash or other securities that we believe possess a low or inverse correlation to the overall market.
INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE