1. The shutdown of the global economy due to COVID-19 has resulted in a deep recession. The intensity of the slowdown is the worst since the Great Depression, and questions remain as to the pace of the recovery.
2. Fiscal and monetary stimulus are serving as the main driver of markets. The Fed has conducted over $1.5 trillion of bond purchases and has yet to utilize much of its crisis lending facilities, while U.S. government spending has also stepped up, which will result in record Treasury supply for the rest of the year.
3. Fixed income supply is running at a historic pace. There has been a deluge of fixed income supply as corporations and the U.S. borrow a record amount. Most corporate issuance has taken place, and most bond supply through the balance of 2020 will come from U.S. Treasuries.
4. Post-crisis, intermediate corporate bonds present attractive relative value versus short and long-maturity corporates. There has been anticipated demand from the Fed for shorter-maturity corporates, while foreign investors have been focused on the long end, which we believe has contributed to the cheapening of intermediate corporates. A barbell versus bullet comparison of the credit curve highlights the relative value of the intermediate corporate sector.
5. In commercial real estate, retail and hotel properties are under extreme pressure while other property types remain stable. We believe that industrial properties and data centers, particularly those that are tied to ecommerce, should fare well coming out of the current environment.
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