Although equity markets recovered to some extent during April, investors’ appetite for risk remained weak. Bond yields picked up towards the beginning of the month amid cautious optimism over the reopening of the US economy.
- The US economy contracted by 4.8% YoY in Q1
- Demand for US Treasury inflation-protected securities (TIPS) was strong
- The IMF expects the global economy to contract by 3% this year
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Although equity markets recovered to some extent during April, investors’ appetite for risk remained weak. Bond yields picked up towards the beginning of the month amid cautious optimism over the reopening of the US economy. However, any nascent positivity was swiftly restrained by fresh fears over the economic outlook that were compounded by plummeting oil prices.
“Any nascent positivity was swiftly restrained by fresh fears over the economic outlook”
The International Monetary Fund (IMF) predicts that the global economy will contract by 3% this year, after which it will stage a “partial” recovery in 2021 with expansion of 5.8%. During the first quarter of 2020, the US economy contracted at an annualised rate of 4.8%, and China’s economy shrank by 6.8%. Meanwhile, the eurozone’s economy shrank by 3.3% year on year and France slipped into recession.
Investors’ appetite for US Treasury bonds was fuelled during the month by disappointing economic data. The ten-year US Treasury bond yield fell from 0.66% to 0.62% over April, having begun the year at 1.92%. Elsewhere, the yield on the 30-year Treasury bond declined from 1.32% to 1.27%, after starting 2020 at 2.3%. Demand for US Treasury inflation-protected securities (TIPS) was strong in April, and the yield on the ten-year TIPS fell to -0.56% during the month.
A “deep” global recession is expected this year, according to Fitch Ratings, which believes that the fall in global GDP in 2020 will be similar to the global financial crisis, but the impact on activity and jobs will be more severe. In particular, the impact of the pandemic, alongside the drop in commodity prices, has created the most adverse economic conditions for emerging market sovereigns in modern times. Fitch believes that the sovereign issuers who are most at risk are those that rely on commodity exports, tourism or remittances, those that have precarious financing, and those with weak credit fundamentals. Fitch has implemented 18 emerging market sovereign downgrades already in 2020, representing the largest-ever annual total in less than four months.
Concerns over the economic impact of the coronavirus has pushed up US corporate credit stress to recession levels, according to S&P Global Ratings, as downgrades rose to make up 90% of total ratings actions. Although most of these downgrades were issuers rated “B+” and below, they also included “fallen angels” such as Kraft Heinz, Ford Motor, and Delta Air Lines.
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