COVID-19

RMBS bondholders should not fear lenders accommodating borrowers’ short term needs for an extended period of time.

Companies, even earnings pressured ones, now need to seriously consider the negative impact on their long term cost of capital from short term decisions to shore up P&L.

The big question for us now is how long the impact of the virus may last, and how much of a supply and demand shock will there be as a consequence of the various efforts to stall its spread.

While there has been a rally in risk-off assets since January over coronavirus fears, credit markets have been largely resilient given strong technical demand, driven by huge inflows for bond funds and the wall of cash sitting on the sidelines.

Perfect timing is practically impossible in situations like these, but one way to tackle this risk is to gradually reduce ‘good’ duration by moving to the shorter part of the UST curve, which would be less sensitive to a move higher in yields.