Three months into 2020, coronavirus fears took hold of global markets — and fixed-income researchers watched as credit markets collapsed at a record pace.
“There was enormous dislocation and disruption from the first or second week of March until sometime in April — and this happened in virtually every market, including the most liquid as well as corporate credit and high yield,” said Vishwanath Tirupattur, global director of fixed income research at Morgan Stanley. “Liquidity dried up quite dramatically in a very short period of time.”
At the peak of market uncertainty, credit spreads had drastically widened, with U.S. high-grade credit spreads reaching above 250 basis points, and lower-rated sectors widening much further, according to Matthew Jozoff, co-head of fixed income, currencies, and commodities research at JPMorgan Chase & Co.
But just as quickly as credit markets blew up, central banks stepped in. Led by the U.S. Federal Reserve, monetary and fiscal policymakers globally took unprecedented actions to stabilize the economy, setting the stage for a rapid recovery in equity and bond markets.
“The Fed not only immediately cut rates to zero, they substantially kicked up quantitative easing,” Tirupattur said, describing the asset-purchasing program as larger than all of the quantitative easing undertaken after the 2008 financial crisis. “The Fed also got involved in the credit markets in a direct way” by buying bonds and exchange-traded funds, the Morgan Stanley managing director added. “This was the most significant departure from what the Fed had done in the past.”
This historic intervention “turned every single client on the street into aggressive buyers of credit,” said Michael Maras, head of global credit research at Bank of America. “Once the Fed was there, there was only one-way traffic.”
It was, as Tirupattur summed it up, “a pretty dramatic year” for credit investors. And that’s where the Global Fixed Income Research Team came in.
As 2020 unfolded, investors turned to their favorite sell-side research providers for the rapid analysis and market insights they needed to make sense of a credit environment unlike any they’d seen before. All of the top firms reported increases in readership and engagement, even as work-from-home orders meant all client interactions had to occur online.
But one firm stood out above the rest, according to the 5,000 investors who voted to determine the 2020 Global Fixed Income Research Team.
JPMorgan Chase & Co. placed as the No. 1 firm in the second-annual ranking of the top fixed-income research providers. The New York-based bank took the top spot after capturing 106 team positions for credit and macro research across the U.S., Europe, Asia, Japan, Latin America, and the emerging markets of Europe, the Middle East, and Africa.
BofA Securities, last year’s top firm, ranked close behind JP Morgan, with a total of 103 team positions. Barclays placed third with 52 team positions, while Citi and Morgan Stanley tied for fourth with 44 positions each.
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“We are proud of how our FICC research team rose to meet the challenges of the past year,” Jozoff said in an emailed statement. “With our clients’ needs top of mind, our teams remained flexible, quickly pivoting amid the volatility by providing real-time insights and significantly increasing the number of research reports they published.”
For example, Jozoff said that JPMorgan launched several new research publications, including a Covid-19 chart book called Crisis Watch and a report tracking quantitative easing in emerging markets. At the same time, JPMorgan analysts adapted to the all-virtual work environment by hosting Zoom presentations and recording podcasts in addition to publishing more frequent reports. These products were backed by new data and quantitative models that JPMorgan used to track the spread of Covid-19 and project losses for commercial mortgage-backed securities, among other things.
“We believe that the frequency of our reports, the accessibility of our research analysts, and their quantitative backing helped our clients navigate the uncertainty,” Jozoff and his FICC co-head Luis Oganes said in an emailed statement.
At BofA Securities, the research response to the Covid-19 credit markets included expanding and initiating coverage of corporate credit and leveraged loans. Maras said that the bank had increased its credit coverage by 12 percent by the end of 2020, while also initiating coverage on 25 loans.
“Clients are looking for more coverage,” Maras said. “They are taking the view that interest rates will remain low and they will need to channel liquidity into products that offer yield.”
This increased demand for fixed-income research was reflected in high attendance at virtual investor conferences and other online events, which also benefitted from clients not having to travel. Maras reported that participation in BofA’s annual credit conferences increased by more than 250 percent in 2020, compared with 2019.
Citi likewise found success in virtual conferences during the pandemic. Global strategy and macro head Robert Rowe said Citi saw “enormously large turnout” for its regional fixed-income conferences, adding that the online format allowed U.S. investors to attend the Asian and European events and vice-versa. Clients could also replay any sessions they missed, he added.
“We were able to deliver a lot of content efficiently and fast,” Rowe said. “As a result we are probably to go do it every year.”
With the pandemic still raging on, Rowe said that Citi’s clients still remain very focused on the impact of Covid-19 and the progress of vaccinations, especially as new, more contagious strains of the coronavirus emerge. Over the next couple of years, however, Rowe said the big question for investors will be how the Federal Reserve walks back the accommodative polices put into place last year.
“There is a lot of concern about the pace of unwinding in the event that we see higher growth,” Rowe said.
At Morgan Stanley, Tirupattur said the research team is projecting that inflation will reach 2 percent by the end of 2021 and continue to rise in 2022. “We have a strong conviction that the Fed will be tolerant of higher inflation,” he said, explaining that Fed recently introduced a new framework that focuses on the average, rather than current, inflation. “We don’t expect the Fed to raise rates until Q3 2023.”
In the meantime, traditional credit investors are likely to remain bullish and continue looking for opportunities further down the credit curve, said BofA’s Maras. As JPMorgan’s FICC co-head Oganes pointed out, the historic developments of 2020 reminded investors of an “old adage” in credit markets: “‘Don’t fight the Fed.’”
