We maintain our call for moderate credit risk in the US market knowing that the Federal Reserve and the US Treasury stand ready to stabilise it if needed and that issuers will improve their credit metrics when the economy recovers.
The riskier segment of the US bond market continues to recover. Ba/BB rated bonds are down 2.9% year-to-date, up from a low of -18% on 23 March 2020, as measured by the ICE Merrill Lynch bond index. On the same metrics, Baa/BBB rated bonds are more or less flat year-to-date, compared to a temporary low of -13% in March. The collapse of corporate bond prices back then was the result of the lockdown measures that sent the global economy into the deepest post-war recession, while the recovery is based on central bank liquidity support and the expectations that the opening of the economies will allow a decent rebound later this year. Incoming US sentiment indices should support the cyclical element. Consumer sentiment surveys due later this week are bound to show a small improvement versus the lows in April, as almost all US states are winding down their virus containment measures. As far as the support from the Federal Reserve is concerned, not too much action has been noted yet. It is fair to say that the Fed’s announcement of support measures in March and April lifted the bond market considerably, but the US central bank has not bought bonds in a material way since then. We still see room for further spread compression of low-investment-grade bonds and Ba/BB bonds, but are not recommending bonds of lower quality than that as the number of defaults is expected to increase further in the shorter term, in particular in the vulnerable retail, transportation and media segments. The ICE Merrill Lynch indices for B and Caa/C rated bond are still down 7.2% and 19% year-to-date, respectively.
Gold: A brightening market mood weighs on prices
The mood in financial markets is brightening, reflecting expectations of an improving economic environment. As a mirror image, gold has been losing ground as of late. Our view remains unchanged. We still believe a recession is fully priced into gold on current levels. Going forward, the key question is if the economic environment will indeed improve or deteriorate again. We see a limited likelihood for the latter and thus remain Neutral.
At the moment it looks like the corona crisis and the related recession are losing their threat for financial markets. Rather than focussing on the fallout from the recession, the markets are reflecting expectations of an improving economic environment. The market mood is brightening, risk is on, and as a mirror image, gold has been losing ground as of late. Prices are down around 3.5% from their recent high at USD1765 per ounce. Our view remains unchanged. We see gold as an insurance in the portfolio, with the price being the premium. As with every other insurance, the premium is getting more and more expensive as risks are rising. We are still of the opinion that our base case of a short and sharp recession is fully priced into gold on current levels. Further fundamental upside would only be justified if the economic environment deteriorated again, for example because of a second wave of infections and another broad-based lockdown spreading from country to country. If that is not the case and the economic environment improves over the coming weeks and months, prices should move lower rather than higher.