1st Half 2020
Leveraged Credit Review and Outlook

  • The economic consequences wrought by the COVID-19 pandemic have been substantial and widespread; significant monetary and fiscal stimulus helped to stabilize the situation
  • Leveraged credit markets experienced heightened volatility and a large drawdown in March; however, performance improved considerably in the second quarter, led by the higher-rated segment
  • I believe the relatively successful reopening of the U.S. economy will continue, though high unemployment and potential regional shutdowns in response to COVID-19 spikes are major factors preventing a smooth “V” shaped recovery

David Breazzano. 2020.07. Bio



Heading into 2020, DDJ had a relatively positive outlook for the U.S. economy, premised on the enactment of the Phase 1 trade deal with China as well as a continued neutral-to-accommodative stance from the U.S. Federal Reserve (“the Fed”). This perspective all changed with the onset of the COVID-19 pandemic. The pandemic thrust us into an environment that is unlike anything we have experienced in our lifetimes and has impacted everyone in America (as well as across the globe) in multiple ways.

In past editions of my CIO Perspective, I have focused most of my commentary on events specific to the leveraged credit market; however, given the events that have occurred in the first half of 2020, a broader review is warranted. That being said, everything I discuss below had a direct impact on the performance of the leveraged credit markets during the period as well as contributes to my outlook for the second half of the year.

In mid-March, as it became clear that the coronavirus presented a real threat to America, governments – federal, state and local – took steps in an effort to mitigate the spread of the virus and prevent the healthcare system from being overwhelmed with COVID- 19 patients. Such mitigation efforts initially included recommendations to practice social distancing and avoid unnecessary travel but quickly escalated to states enacting “stay-at-home” orders as well as closing schools and all non-essential businesses for an indeterminate period of time. The U.S. was not alone in such actions as many countries, particularly in Europe, took similar steps. Stay-at-home orders remained in effect during most of April; however, by early May, certain regions that were less affected by the virus at that time (e.g., southern and western states) began the process of reopening their economies. As of this writing, all states are in the process of reopening their respective economies; however, the degree of reopening varies significantly across the states.

The economic consequences wrought by the COVID-19 pandemic have been substantial and widespread. In particular, the decision by state and local governments to essentially shut down large portions of the economy in an attempt to combat the spread of the pandemic caused an unprecedented, sharp decline in economic activity. Such decline was evident in many key economic metrics; for example, retail sales in March suffered the largest decline on record and the IHS U.S. Composite PMI for March – a reliable predictor of GDP – posted its largest drop since the series began in October 2009. However, in my view, recent employment data is most representative of the sheer speed and magnitude of the decrease in economic activity caused by the pandemic. Specifically, on the week ending March 14th, roughly 281,000 Americans filed for initial unemployment claims; the following week, as economic shutdowns started to ramp up, 3.28 million claims were filed, more than four times the previous weekly record, with another 6.6 million initial unemployment claims being filed the following week ending March 28th. Furthermore, on May 8th, the Department of Labor reported that U.S. payrolls decreased by 20.5 million workers in April, causing the unemployment rate to surge from 4.4% in March to 14.7% in April. Both the number of monthly job losses in April together with the unemployment rate reflected levels not seen since the Great Depression. As of this writing, the cumulative number of Americans that have filed for initial unemployment claims over the last 15 weeks is over 48 million, while continuing claims, an estimate of the number of individuals currently receiving unemployment benefits, remains elevated at 19.3 million.


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