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May 2020 Monthly Commentary - Liquidity Roars Back in May as the US Economy Tests Re-Opening

May 2020 Monthly Commentary

Liquidity Roars Back in May as the US Economy Tests Re-Opening

Investors will remember May 2020 for the vast amounts of liquidity that poured into global markets as both equity and debt markets (especially the municipal bond market) experienced swift rebounds in spite of the continuation of the pandemic led economic shutdown across much of the United States.

Markets embraced the positive catalysts created by the massive Federal Reserve asset purchases, Covid-19 stats and hospitalization rates, and optimistic news on “vaccine progress” from several of the leading health pharma companies. Above all, the rollout of phase-one of business re-openings across certain U.S. cities and states gave many hope that a return to somewhat “normalcy” lay on the horizon.

Economic data continued to show significant signs of weakness as manufacturing, consumer confidence, retail sales, and US employment painted a vibrant picture of what the result is means for a country to be in the grips of an economic shutdown. Existing and new home sales offered a bright spot in the economic data while inflation reports on core CPI and PPI continued to plunge, giving investors solace that inflationary pressures would not surface in the near term.

The Federal Reserve remained vigilant in both their messaging and response to the economic challenges being faced.

  • The Federal Reserve balance sheet has increased $2.9Tn since March. In just over eleven weeks, the amount of stimulus injected into the system has surpassed the total five-year increase markets saw after the Financial Crisis[1]. The Fed released data on their fixed income ETF purchases which they began on May 12th as part of the Secondary Market Corporate Credit Facility Program. The central bank’s total holdings of ETFs invested in corporate debt amounted to $2.98 billion as of May 26, 2020[2] (these included prominent names such as LQD, VCIT, DCSH, HYG).

  • The latest FOMC meeting minutes revealed discussions regarding yield curve control (pegging treasury rates, similar to past efforts instituted by the Bank of Japan).

  • Fed speakers gave the opinion that negative rates are not an appropriate response for the US at this point, although they seem willing to use every tool at their disposal to return the nation to economic growth. They continue to be very vocal on the need for further fiscal response and the possibility of a virus re-lapse.

  • Most sectors participated in the liquidity-led rally throughout the month of May;

  • The return on the S&P 500 Index was +4.76% for the month.

  • Technology stocks were the best performers.

  • Both developed and emerging market equity indices were driven higher.

  • Beta sectors also rose, including small-cap stock and high yield bond indices.

  • Commodities saw positive price action during the month as crude oil recorded an impressive rebound from its April downturn (WTI NY futures were up over 62% in May).

  • Prices of Gold were slightly higher as well, despite the broad “risk-on” sentiment.

  • Treasury Markets:

  • The yield curve grew steeper as short-term treasury prices were slightly firmer, and longer maturities fell almost 2.0% in price as the result of increasing supply and economic optimism

  • The 2Yr Treasury yield ended the month at 0.16% vs 0.20% on 5/1/2020

  • The 30Yr Treasury ended the month at 1.41% vs 1.27% on 5/1/2020

  • On May 20th, the Treasury issued its first 20-year bond in over a generation. The auction of the new “on the run” bond was well received. Other treasury auctions saw low demand due to extremely low yields and the historically massive supply of issuance into the investment-grade bond sectors.

  • Corporate Bond Markets:

  • The Bloomberg Barclays Corporate Bond Total Return Index was up +1.56% in May.

  • The corporate bond industrial sector was up 1.94%.

  • The corporate bond financial sector was up 1.34%.

  • Corporate debt issuance passed the 1.0 trillion dollar mark on May 28th as companies took advantage of ultra-low rates and investor appetite. The pace of issuance was approximately double that of the same period last year.

  • High-quality bond deals have highlighted the liquidity injected into the markets from the Fed’s bond purchasing programs.

  • Many deals were well oversubscribed as insatiable demand drove new issuance yields immediately lower…ex: the Hersey Company’s (NYSE: HSY) $1.0 Billion three-part offering was fourteen times oversubscribed ($300 million of 0.90% fixed-rate notes due 2025, $350 million of 1.70% fixed-rate notes due 2030, and $350 million of 2.65% fixed-rate notes due 2050).

  • Municipal Bond Markets

  • The municipal bond market notched its biggest performance month since 2009 (+3.18% in May) as the muni market was perhaps the biggest beneficiary of low Treasury bond yields and investment grade demand.

  • Strong May performance brings returns positive YTD for 2020, as the illiquidity and “forced selling” from just two months ago in the sector begins to fade into the past.

  • Renewed comfort in the muni sector has resulted from fiscal and Federal Reserve backstops, positive credit news (including positive budget news out of Illinois), historically “cheap” valuations versus treasury bonds, and cautious optimism around state and local economic re-openings.

May’s optimism may be tested in June as optimistic health news is strained by nationwide civil unrest and protests in response to the controversial death of George Floyd in Minneapolis. The uncertainty around the current health pandemic, its economic repercussions, and social justice debates will continue to be political pressure points as we countdown the 154 days to the next US Presidential Election.

Yields remain ultra-low, and the Fed is investing in the market more than ever.  Zero interest rate policy (ZIRP) seems to be in place for the foreseeable future. While much of the “easy” money seems to have been made in markets over the last two months, the Piton team believes it is imperative to have a portion of your overall portfolio focused on safety, liquidity, tax efficiency, and yield.

Piton’s investment team continues to focus on constructing quality portfolios intended to perform over the long-term with a lower standard deviation than many other fixed income oriented mutual funds, ETF’s and other “alternative” fixed income strategies.

Please reach out to the Piton team at 646-518-2800 to discuss the current market environment, to receive additional detail on the performance of Piton's portfolio's or for a review of your current fixed income allocation.


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