November 17, 2020 | Cameron Parkhurst
After an expected, but undecided election, the last week’s news regarding Pfizer, Moderna, and allegedly Russian companies producing vaccines with 90-95% efficacy rates, we saw surprising moves in the markets. The stock market was temporarily up 1600 points late last week, and the 10-Year Treasury moved from 0.75% to almost 1%, on the day of the Pfizer announcement, then pulling back towards 0.85%. The market seems dependent on vaccine news right now, with both the S&P and Treasury markets waxing and waning based on news updates regarding future vaccine probabilities and potential distribution calendars.
One would think, based on the election, and on the virus seemingly re-emerging in force, we would have seen a significant amount of uncertainty in the markets. This was quickly shrugged off in favor of us being saved from a long, drawn out Armageddon re: COV-19.While no one knows what the final outcome will be regarding clinical trials, and whether this vaccine perpetuates through the US and world population, it is certainly a sign of what we could expect if COV-19 becomes contained. The question also remains around politics and policy, dependent on who becomes our next president on January 20th, likely Joe Biden, along with which party ends up controlling the US Senate.
With all of the above in mind, the PeachCap fixed income team has had numerous discussions about where we plan to focus our RIA client fixed income investments during these times. Central theories are to buy where we can get good yields spread without taking undue risk, and consistent re-evaluation of the markets that we deem to be risky. Let’s take an egregious example …we could discuss NY MTA, but we won’t go there. That story is very opportunistic, dependent on how you see this playing out. If we were managing a large fund, we’d likely be taking bets there (assuming a vaccine), but we don’t here for our traditional Institutional clients.
We manage small to mid-size portfolios for RIAs, and so cannot afford to make a mistake on defaults/volatility (not that we believe MTA will ultimately default). Let’s focus on something different. A regional airport. Shreveport Regional Airport, LA. Their slogan is “More Flights, More Destinations, More Often”. Nationwide, as COV-19 emerged, their ridership slumped to essentially 35% of normal during COVID-19…and they deliver passengers to the hub airports. Nationwide, per the chart below, Ridership has not broken above 1 million passengers. More importantly, we are seeing a trend around 20-30% ridership all in. This might increase with the holidays coming up, but not significantly.
It seems that some airlines are failing, and mothballing planes. EETCs (Equipment Trust Certificates), which used to be the hallmark of super secure investments, are being downgraded by the ratings agencies. These bonds are securitized by physical assets…tail numbers on planes in this example. Other physical assets in the transportation industry are also seeing downgrades. This is abnormal for sure.
This ultimately leads us to an analysis of where the best risk/reward trade off exists in the fixed income markets. Evaluating everything on credit for yield gained, and on beta (volatility/performance delta when markets move significantly in either direction), we continue to like high quality tax free and taxable municipal bonds. They offer quite nice yields in relation to Treasuries, and stand out when compared to most agencies, corporates, etc. of similar quality.
With rates rising late last week from 0.75% to 0.95%, we saw an interesting phenomenon develop as well. Normally, in times like this, as traders, we would see a fairly “sloppy” market. This time, it still seemed like the market was very tight, almost locked up, with not much trading. The market has been this way for weeks, but as we source bonds, there has been value seen in buying, for example, taxable munis 125-150 basis points over Treasuries. Especially for the buy and hold investor, we can get a good yield pick-up in utilizing the municipal market relative to agencies and corporates…with less volatility. Also, for those wanting to trade more actively, we can utilize the offer side and provide value there to clients wanting to sell bonds at better prices than simply getting bids, assuming they aren’t in a hurry to sell. We continue to hold the course and feel that our wheelhouse sub-asset classes provide the most value here, albeit in an environment where we are at low yields.
We are here to always support you as your client’s Advisor, and so please do not hesitate to send over portfolios and global holdings for us to review and provide feedback. This is one area where we provide the most value to you who are forward facing to your clients and prospective clients.
Thanks,
Your PeachCap Fixed Income Team
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