1. Fed May Step Up & Extend Emergency Programs The Fed is only buying a relatively small number of bonds each day at present, Brill noted. However, that is an indication the market is working again right now, he said.
Brill predicts that the Fed will start buying significantly more bonds again if volatility returns to the market, in an effort to get the market back to normal. “From our standpoint, that’s a really powerful thing,” he said.
The Fed already extended its emergency programs through the end of 2020. Brill anticipates the Fed will end up extending them through at least mid-2021.
2. Expect More Debt Migration to High Yield Some $150 billion in debt has migrated from investment grade to high yield thus far in 2020, Brill said. “That’s a very large number,” he said, predicting $50 billion to $75 billion more will shift to high yield by year-end.
3. More Market Losers to Come “There’s definitely going to continue to be some losers in this market,” Brill said. For example, “We believe that if you are in the airline business, the hospitality business or the retail business, you’re obviously going to have some trouble here until the vaccine is developed and ... disseminated,” he said.
In a nutshell, “If you were a troubled company going into 2020,” the pandemic “really just accelerated that,” he noted.
4. Defaults to Spike About 10% of the high-yield market could be affected by defaults this year, Brill predicts. “We’ve already seen much of that already,” he said.
5. Downgrades Coming for Munis Unlike in the corporate bond market, a large amount of defaults in the muni market are not anticipated, according to Paris. But, he added: “We are expecting some downgrades.”
6. Higher Taxes on the Way “The federal government has spent a tremendous amount of money” to stabilize the markets, Paris said. “I praise the federal government [and] I praise the Fed for moving so quickly,” he said. However, “There’s going to be a cost to that. And the cost of that is going to have to be higher tax rates” at the state and federal levels, he added.
7. More Money to Flow Munis' Way “More money is going to continue to flow into munis as the year goes on, as we get closer to the election," said Paris. "That’s going to continue to skew the supply-demand aspect of the marketplace -- [meaning] less bonds to buy [and] more money chasing those bonds.”
8. More Government Help to Come ... Eventually “What I'd like to see is another CARES Act passed” that would help municipalities, Paris said.
Despite the lack of a new stimulus bill being agreed upon in the Senate thus far, “There is some help coming pretty soon” to support municipalities, he predicts. “They’ve just got to kind of get their act together in Washington.”
During a recent webcast — “Balancing Income and Volatility as the Credit Cycle Matures” — fixed income experts with Invesco highlighted ways investors can balance their pursuit of income with a deeper understanding of risk.
Laurie Brignac, chief investment officer and head of Invesco Global Liquidity, discussed the main traditional and non-traditional tools the Federal Reserve used at the start of the COVID-19 pandemic to prevent March’s massive stock market volatility from getting worse.
Those non-traditional tools included the Fed’s March 23 announcement that it would buy corporate debt for the first time in history, pointed out Matt Brill, head of US Investment Grade for Invesco Fixed Income.
He and Mark Paris, chief investment officer and head of Municipal Strategies at Invesco, went on to make several predictions for the fixed income market. Eight key expectations are explained in the above slideshow.
Related: 8 Reasons to Rethink Your Approach to Retirement Planning