By David Riley, Partner, Chief Investment Strategist at BlueBay Asset Management

The exogenous shock to the global economy of the coronavirus pandemic is the catalyst for a violent and painful re-pricing of growth-sensitive risk assets.

Until the virus is brought under control and the path to recovery from recession is visible, it seems extreme volatility will continue to characterise financial markets and weigh on risky assets.

Extraordinary uncertainty, volatility and the dash for cash currently overwhelm valuations and fundamentals as the principal drivers of asset prices. Nonetheless, from a historical perspective, high yield credit spreads and bond prices are at levels that are typically associated with subsequent positive investment returns.

Governments and central banks are almost daily announcing further extraordinary policy interventions to limit the permanent economic damage from measures to contain COVID-19. If successful, the increase in corporate defaults will, in our opinion, be less than from prior recessions and the subsequent economic recovery and rebound in asset prices more rapid.

Our estimates suggest that credit spreads imply annual default rates of around 13% and 11% for US (ex-energy) and euro high yield bonds – broadly comparable to the peak annual default rates in the global financial crisis.




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