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Fixed Income Market Update-March 25, 2020

Portfolio Manager / Argent Trust Company

In the wake of the coronavirus pandemic the market’s response has been nothing short of extraordinary. Just a week before the recent downslide started, equity markets were at an all-time high and there was virtually zero talk of a recession. Fast forward to today, and the likelihood of a recession is probable. According to Bloomberg, the estimates of a recession are north of 50%.

In times of uncertainty where the likelihood of economic growth rates are unknown, such as what we’re experiencing now, there may come an opportunity to capture value caused by not only the market’s reaction, but also by the needs of market participants. Liquidity, for instance, is a fundamental pillar that keeps the financial markets functioning, and in times of high-stress, market participants are willing to concede large premiums to those who are willing to provide it. There are numerous examples, but the municipal bond market is currently experiencing aggressive price discounting and has yielded valuable opportunities for those looking for tax-free income. Values, measured by bond yields as a percentage of U.S. Treasuries, are extraordinarily high, making the municipal bond market selectively attractive. To put this into a yield perspective, one month ago the yield-to-maturity on a five-year AAA rated municipal bond was earning near 1% on average, we’re now seeing those similar bonds offered north of 2.5%. In taxable-equivalent terms, an investor in the highest tax bracket would earn 4.77% per annum, depending upon his or her state income tax situation.

Unlike the corporate credit market, where cash-flows are less predictable and debt levels are high, from an historical and macro perspective, municipal bond cash-flows backed by ad valorem property taxes are stable and not likely to be impacted as much by market turmoil as corporate debt.

Over the past four weeks corporate spreads on 10-year bonds have increased from 124 basis-points over treasuries to nearly 400; an unprecedented move in such a short time-period. The reasoning behind such a pronounced move is increased business uncertainty and the financial strain companies around the world are experiencing.

Finally, as a reflection of market expectations and the Federal Reserve’s recent move to lower the Fed Funds rate to a
lower-bound target of 0.0%, rates across the Treasury yield curve have fallen precipitously, with short-term rates
falling faster than long-term rates; also known as a “Bull-Steepener.”

Here at Argent, we’re always looking for opportunities to enhance yields as well as mitigate risk. Given the extraordinary moves in yield spreads witnessed over the past four weeks, we believe there are opportunities to enhance portfolio returns with respect to tax-exempt bonds, as well as non-energy high-yield bonds, and we are looking to do so tactically, and where appropriate, as cash values permit.

If you have any questions or would like to discuss further, please feel free to reach out to our fixed-income team:

Samuel N. Boldrick III – (210) 352-2414
J. Hutch Bryan Jr – (210) 352-2411
Oren M. Welborn Jr – (318) 588-6720

Not Investment Advice or an Offer
This information is intended to assist investors. The information does not constitute investment advice or an offer to invest or to provide management services. It is not our intention to state, indicate, or imply in any manner that current or past results are indicative of future results or expectations. As with all investments, there are associated risks and you could lose money