Changing Tact and Swimming Naked

As I’ve written about recently, I’ve allocated almost all of my clients’ bond investments to Treasuries and away from corporate bonds the last couple years. This worked well especially early in the pandemic / economic crisis we find ourselves in currently as corporate bonds lost value and Treasuries gained initially. However, it may be time to change tact.

The reason I made that shift a couple years ago is because I saw the quality of corporate debt, broadly speaking, had been deteriorating. I feared there would be a sharp rise in corporate defaults once we entered a recession because there were many more corporations than normal that were barely hanging on (i.e. zombie companies). I was concerned that even a mild shock to corporate revenues could cause a cascade of defaults that would ripple through the financial system.

Warren Buffett has been known to say something along the lines of, “You see who’s swimming naked when the tide goes out.” Sure enough, this global pandemic has exposed A LOT of naked swimmers.

My views on the health of corporate financials have not changed…in fact, they’ve been confirmed the last month. However, we received a game-changing announcement from the Federal Reserve last week. In response to all the “nude swimmers” that have been revealed and cracks that have been forming in the capital markets, the Federal Reserve announced they would be buying corporate bonds on the secondary market in addition to a variety of other lending programs. I’m not even entirely sure it is legal for them to do this, but they are moving forward regardless. So, although I hate to buy corporate bonds at this point for fundamental reasons, it’s very difficult to sit on the sidelines if the Federal Reserve is intent on propping up these assets. There’s a common saying in finance “Don’t fight the Fed.”

Therefore, some clients will see trades over the next couple days as I adjust portfolios accordingly. I’m still maintaining dedicated Treasury exposure within clients’ bond sleeves, but I will begin re-establishing an allocation to other debt securities as well. It’s crazy to hear me say that in the midst of the sharpest economic downturn since at least the Great Depression (if not “ever”). I’m still maintaining relatively conservative positioning as well. These changes impact only a portion of the fixed income sleeve of client portfolios. I am still generally underweight stocks for most clients at this point.

 

Disclosures:

Past performance is no guarantee of future results. All investments maintain risk of loss in addition to gain.

Data from third-parties is believed to be reliable but accuracy is not guaranteed. Much of the data used to interpret the markets and forecast returns are often at odds with each other and can result in different conclusions. Many different factors impact prices including factors not mentioned here.

This is NOT investment advice but merely a general commentary. Individualized investment advice cannot be provided until a thorough review of your unique circumstances and financial goals is completed.

Views provided here are current only as of the moment of posting and are subject to change at any time without notification.