There has been an indiscriminate sell-off of ‘safe haven’ sovereign, investment grade and high yield debt, according to Jupiter bond manager Ariel Bezalel. 
In a recent update, Bezalel said that a key feature of the coronavirus crash was “forced selling” from investors who had to sell their most liquid assets to raise cash, which hit US Treasuries hard.
However, Ariel Bezalel, head of fixed income strategy at Jupiter, explained that it was “not an entirely shocking development” and that similar price action was seen during the global financial crisis, which proved to be only temporary.
“Once chaotic flows slowed down, fundamentals reasserted themselves and Treasury yields dropped,” he said. “We’re seeing this dynamic play out again now, with Treasuries now showing signs of stabilising following the liquidation phase.
“We anticipate that safe haven assets like government bonds will continue to stabilise in due course and continue their trend of relative outperformance, but in general investors should be braced for more volatility.”
Performance of bond sectors over 2020
Source: FE Analytics
Bezalel praised the combination of the fiscal and monetary policy response to the coronavirus pandemic by governments around the world and said the cumulative effect has been better sentiment in credit markets.
He highlighted the US government’s approval of a $2trn fiscal stimulus package and the US Federal Reserve announcing it would buy an ‘unlimited’ amount of US Treasuries and commit to $300bn of investment-grade corporate bonds and asset-backed securities purchases.
The Fed’s actions supported the credit market and that the purchases of corporate debt were largely unexpected, subsequently creating a positive impact on markets, the manager added.
Elsewhere around the world, the Bank of England cut the base rate to 0.1 per cent and restarted its quantitative easing, the Reserve Bank of Australia cut rates to 0.25 per cent and announced quantitative easing and yield curve control, and the ECB unveiled a €750bn new bond-buying programme.
Bezalel – who runs the £4bn Jupiter Strategic Bond fund – said all these actions were ultimately positive for both government bonds and corporate credit markets, although cautioned they are likely to remain volatile.
“As volatility continues, it is not unlikely that we could see the Fed stepping in to purchase equities, as indeed the Bank of Japan has been doing for some time,” he continued.
Performance of Jupiter Strategic Bond vs sector since launch
Source: FE Analytics
Jupiter Strategic Bond benefited from taking a defensive stance at the beginning of the year, with hedges in credit default swaps and a short on the Omani rial cushioning the blow. But its position in high yield, particularly in energy, was the largest detractor, the manager revealed.
At present, he is bullish on US, Australian and New Zealand government bonds, expecting rates to remain low.
Bezalel also explained the fund is “cautiously” increasing exposure to credit, particularly “high quality, defensive opportunities that have been driven by forced selling of short-dated paper”.
Longer duration senior-secured notes in defensive sectors like telecoms have also been added to, as has bank exposure on “attractive double-digit yields”. High yield exposure is around 33 per cent.
The manager is also steering clear of sectors such as airlines, autos and the leisure industry, but holds debt from protein producers “which benefit from pork supply and demand disruption in China”.
“Despite the supportive measures announced by governments and central banks, many companies are vulnerable to default risk and may not be able to survive the wait for fiscal support,” he warned.
With emerging market sovereign debt, the fund is minimising exposure whilst maintaining short-duration emerging market US dollar sovereign bond exposure from the likes of Egypt and Ukraine.
These countries are liked because of their high cash reserves, low reliance on oil and commodity exports, and multilateral financing support, with yields of almost 10 per cent in US dollars for one-year bonds.
Performance of major currencies vs US dollar in 2020
Source: FE Analytics
The strategy is also long the US dollar, which has so far outperformed all other major currencies.
“As the world’s reserve currency, we believe that we are now entering a period in which the US dollar will be king, driven in part by the shortage of dollars in offshore markets” Bezalel explained.
This will likely cause “considerable pain” to the global economy, especially in emerging markets where US dollar-denominated debt is estimated stand at around $12trn in aggregate.
He also highlighted potential struggles in the Middle East, as the impact of the drop in oil prices will likely be exacerbated by dollar strength.
“There are simply not enough dollars going to the outside world at this critical juncture” he argued.
Giving an overall outlook, Bezalel said he is closely looking for signs that the market has priced in the worst impact of the coronavirus.
This isn’t likely to happen until infection levels peak in Europe and the US, and that the day “still seems a way off”.
When economic recovery does come, the manager expects a slow-burn recovery, not a V-shaped rebound.
“Despite our continued caution, we ultimately see this crisis as an opportunity to generate returns for our clients into the future, taking advantage of mispriced credit in financially strong issuers,” he finished.
Bezalel’s Jupiter Sterling Strategic Bond fund has generated a total return of 15.70 per cent over the past five years, compared with 9.99 per cent from its average IA Sterling Strategic Bond peer. The fund is also down 1.73 per cent year-to-date versus 6.19 per cent from the sector.
The fund currently yields 3 per cent and has an ongoing charges figure (OCF) of 0.73 per cent.