Boston - Eaton Vance and its affiliates seek to actively capitalize on opportunities presented by volatile investor sentiment, while ensuring that the portfolio risk profile remains appropriate for the specific strategy. The following are excerpts from a recent conversation with Jeff Mueller, Co-Director of High Yield Bonds and Portfolio Manager at Eaton Vance Advisers International Ltd and Justin H. Bourgette, CFA, Portfolio Manager at Eaton Vance Management.1
What we are seeing: Market volatility in March 2020 was among the most severe episodes ever recorded for credit assets. However, a significant snapback ensued from the last week of the month after policymakers pledged unprecedented support for the global economy, including explicit support for financial markets. Notably, as part of the support package, the US Federal Reserve (Fed) will purchase sub-investment grade bonds. In essence, the Fed has had its own "whatever it takes" moment, akin to that of European Central Bank President Mario Draghi in 2012.
In addition to policy support, we are seeing tentative steps being taken to re-open economies in European countries such as Italy, Spain and Denmark. At the same time, the Organization of Petroleum Exporting Countries (OPEC) is implementing a historic cut to production to support the low price of oil. Surprisingly, however, the cut seems to have disappointed markets, with the oil price dipping below US$20 per barrel on April 142 and the US benchmark West Texas Intermediate falling into negative territory on April 20 because of storage constraints.3
What we are doing: We are staying patient, firm in the knowledge that chasing markets is not a recipe for investment success. We have continued to see investor interest in credit opportunities and have deployed new capital raised toward the securities of high-quality issuers that offer increasingly attractive yields now that prices have opened up.
At an asset-class level, we believe that the two core credit markets of high-yield corporate bonds and floating-rate loans offer compelling long-term value relative to other areas of credit and have added to both. That said, we see some niche opportunities in securitized credit, particularly in mortgage-backed securities, an area of the market that suffered disproportionately during the sell-off.
What we are watching: We are still in the midst of the market turmoil and await further signs of weakness. Specifically, we are watching to see how the metaphorical tug-of-war that governments are set to engage in will unfold. For instance, how effective will attempts to re-open economies be with regards to second- and third-wave infection outbreaks? Will these governments be forced to rollback easing measures and re-impose restrictions on social contact? With expectations for some back and forth in this respect, we remain skeptical about any rush to spot the green shoots of recovery.
Final word: Market dislocations always feel the worst when we are right in the middle of them, but the speed and scale of the global response from policymakers gives us confidence that the global economy will recover from what we expect is already a recessionary environment across the world. Calling the bottom (prices) or wides (credit spreads) is difficult and the recent volatility may worsen before the market begins to get better. However, we believe that the valuations currently on offer could provide an attractive level of compensation relative to the uptick in defaults that we are likely to see across loan and bond markets ahead.