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The Weekly Economic & Market Recap
August 7, 2020
2020 has thus far been a year filled with economic, social and emotional turbulence and hardship. Fear and uncertainty regarding the forward path of Covid-19 has left numerous corporate income statements devoid of much needed revenue after a decade of indulging on cheap debt, which altered the financial health of many companies. Moreover, bankruptcy filings of companies with liabilities of at least $50 million are on pace to be the most since the recession that followed the financial crisis back in 2008. But the situation would have been much worse had the Fed not instituted an enormous open-ended bond purchasing program, along with numerous liquidity facilities targeted at corporate bonds among other asset classes. Moreover, short-term funding costs as measured by the spread between 90-day commercial paper and Treasury bills has compressed to an extremely low 7 basis points (bps) after spiking on March 24th to over 205 bps. Also, credit spreads have dropped precipitously since their March highs. Furthermore, U.S. high yield bonds experienced tremendous demand during the month of July as yields fell the most during any single month on record. Historically, when bankruptcy filings and defaults pick up, credit spreads tend to widen in order to compensate investors for the increased probability of potential losses. Right now, the high yield market is being distorted to a degree as many troubled companies work to outlast the downturn by deferring rent payments, obtaining temporary reprieves from suppliers, furloughing workers and applying for government aid. The previously mentioned tactics along with extremely accommodative monetary policy has undoubtedly kept companies in business longer than what would have been imaginable. However, the pace of the economic recovery will ultimately decide the severity of the credit cycle and given the current unknowns and the diminished upside potential in the high yield market, we feel this asset class should be approached with caution.
Click below to listen to this week's Peapack Private Wealth Management Market Report as heard on WCBS NewsRadio 880.