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Jeff Mueller, portfolio manager, multi-asset credit, Eaton Vance
KEEPING THE REINS LOOSE
As credit-markets investors, the multi-as- set credit team at Eaton Vance focuses on fundamentals and valuations as the key drivers of long-term returns in the core markets of high-yield bonds and floating- rate loans. An area that we are paying closer attention to right now, however, is the monetary policy of major central banks, which we expect may be a key driver of credit market developments in the short term.
Global money growth Monetary policy continues to be support- ive of growth. In chart 1, we see that the balance sheets of global central banks hit an inflection point late last year, with year- on-year changes in absolute holdings tip- ping from negative back into positive ter- ritory. The reversal reflects a move by the US Federal Reserve and European Central Bank to re-start asset purchase pro- grammes in the second half of 2019.
We can observe the effect of the balance sheet expansion in the chart on the right- hand side, which shows the growth rate for the global money supply, an important indicator of credit growth and future spending tracked by economists and poli- cymakers alike. After bottoming out in late 2018, global money supply growth is rebounding strongly. The Fed’s decision to keep rates unchanged at its January policy meeting should support this further, in our view, as we do not believe that the full impact of the Fed’s three earlier rate cuts in 2019 has yet to be felt completely.
Demand up, defaults down? Conventional economic thinking sug- gests that an increase in the supply of money is likely to precede an increase in consumer spending, investment by firms and an overall boost in aggregate demand.
And an upturn in global demand should be a boon for companies. As such, we do not expect to see a worsening in credit quality in the short term. Notably, default rates for high-yield bonds and floating- rate loans are already low by historical standards at the 3% level, while distress ratios for high yield and loans are modest and falling.
In conclusion, the easy monetary policy from central banks is currently increasing liquidity in the financial system and fueling an increase in the global money supply. While we recognise we are in the latter stages of this credit cycle, the trends apparent in the charts below represent two key reasons why we believe the next spike in default rates is far from immi- nent across the core credit markets of high-yield corporate bonds and floating- rate loans.
Chart 1: Central bank balance sheets and global money supply
-2 -1 0 1 2 3 4
0% 2% 4% 6% 8% 10% 12%
Source: Macrobond as of December 31, 2019. Central bank balance sheets measures Federal Reserve, European Central Bank, Bank of Japan and People’s Bank of China. M2 measures the most liquid portions of the money supply, including currency and assets quickly converted to cash as well as several less-liquid as- sets. Past performance is not a reliable indicator of future results.
Sources: Eaton Vance, Macrobond. As of 31/12/19. For Professional/Institutional Investors Only. Issued by Eaton Vance Management (International) Limited (“EVMI”), 125 Old Broad Street, London, EC2N 1AR, UK. EVMI is authorised and regulated in the UK by the Financial Conduct Authority. This material, issued for informational and illustra- tive purposes only, should not be construed as investment advice. It has been prepared on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. No assurances are provided regarding information taken from public and third-party sources. Information contained herein, is current as of the date indicated and is subject to change at any time. The views and strategies described may not be suitable for all investors. Past performance is not a reli- able indicator future results. An imbalance in supply and demand in the income market may result in valuation uncertainties, greater volatility, less liquidity, widening credit spreads and a lack of price transparency. Investments in income securities may be affected by changes in the creditworthiness of the issuer and are subject to the risk of non-payment of principal and interest. The value of income securities also may decline due to real or perceived concerns about an issuer’s ability to make principal and inte- rest payments. As interest rates rise, the value of certain income investments is likely to decline. Investments involving higher risk do not necessarily mean higher return po- tential. There can be no assurance that the liquidation of collateral securing an investment will satisfy the issuer’s obligation in the event of non-payment, or that collateral can be readily liquidated. The ability to realise the benefits of any collateral may be delayed or limited. Investments rated below investment grade (typically referred to as “junk”) are generally subject to greater price volatility and illiquidity than higher-rated investments. Loans are subject to pre-payment risk.
Issue 91 | March 2020 | portfolio institutional | 9
Central Bank Balance Sheet YOY Change ($T)
2003 2005 2007 2009 2011 2013 2015 2017 2019
YOY Change
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
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