Emily Roland, John Hancock Investment Management Co-Chief Investment Strategist joins the Yahoo Finance Live panel to discuss Mnuchin’s decision to cut Fed lending power and what this means.
AKIKO FUJITA: Secretary Mnuchin saying this morning that the corporations don't need the money anymore, that this money should be reappropriated for programs like the PPP. What do you make of the Treasury's move, first of all? And do you agree with the Secretary?
EMILY ROLAND: Yeah, I mean, we were very surprised to hear the backlash here. And, you know, this is a time, certainly, where you want the chairman of the Federal Reserve and the Treasury Secretary to be working in lockstep as we look at the number of COVID cases rising here, we look at this soft patch that's starting to play out in terms of the economic recovery over the next few months.
And, you know, there's some element of Mnuchin's proclamations that's correct in a way. So if we look at the total amount in the primary and secondary corporate credit facilities, about 750 billion was designated for this. And they've only used, actually, about 30 billion of that total facility.
So it was really just the announcement of the creation of these special facilities on March 23 that actually restored the calm to the fixed income markets and provided that, sort of, liquidity backstop that markets have reacted to. And you saw, you know, that was the day we can all look at the charts that we saw the peak in both high yield and investment grade bond spreads.
And we've since seen them, of course, narrow quite meaningfully. I think you could see that narrative shift a bit, particularly as it relates to the high yield bond market. And you might see the Fed kind of move back to the more traditional tools that they've been using throughout this, like QE.
ZACK GUZMAN: Yeah, that was going to be my question to you. Because obviously, you can have a debate here in terms of how effective some of those policy positions and programs that haven't really been tapped as much as people thought they would be. What the impact would be in the credit markets when we saw it kind of come off-- or the plans announced by Secretary Mncuhin there. Because, you know, it hadn't proved to be as effective, I guess, then what maybe people were hoping for back in March when all this was starting to just first play out.
EMILY ROLAND: Well, I think it was effective in the sense that investors have felt very comfortable embracing corporate credit. But what's been really notable to us is that since March 23, spreads have narrowed both in the investment grade and high yield bond space. And I think it's important to remember that, you know, the Fed can do a lot here. And it's been incredibly important what they've done to, again, provide liquidity to the market.
But they can't prevent defaults from happening. And we've seen this interesting dynamic in the high yield bond market where spreads continue to come in, yet the forecast for default rates is actually moving higher. That's a very unusual dynamic. We usually see those happen at the same time.
So we do think that there are some risks there that investors actually haven't been adequately rewarded for being invested in the high yield bond area, that's been an underweight for us. We do continue to like investment grade corporate bonds here. The fundamentals are more really sort of appealing to us in that part of the market.
But I also think this is a time where you're going to start to see active management become a lot more important in this space as well as you don't just have that automatic backstop in place. You actually need to do some fundamental credit analysis to start to add value or add alpha in a portfolio.
AKIKO FUJITA: Having said that, Emily, how do you think that the macro environment is shaping up right now? When you look at the increased case counts, the possibility of some of these small businesses having to face closure again, although not probably to the extent they did early on in March and April. There's no question a lot of these businesses are going to be struggling increasingly.
How are you looking at that, and how does that shift your investment case?
EMILY ROLAND: Yeah, it was a pretty sober analysis from the first couple of guests that you had on today. Not only the work that we still need to do in order to figure out how the vaccine's going to get distributed, who is going to get it, as well as a reminder of some of the really significant challenges that we're seeing right now on the economic front, as we need to recognize how many people are really struggling right now and how worse that might get if we don't get an extension of some of the fiscal stimulus and other benefits that folks have been receiving at the end of the year.
So I do think the economy here is in for a bit of a rough patch. We've started to see a real deceleration in the pace of improvement. You look at things like retail sales, which have disappointed. You look at areas like initial jobless claims, that just increased after a four-week decrease just this-- just yesterday.
You know, markets are clearly looking past that. We all know that markets are forward-looking, economic data is backward-looking. And, you know, they're pricing in the vaccine and the reopening in 2021. And we want to have some exposure to that. We want to have cyclical areas of the market that will benefit from a reopening and a portfolio.
But we also don't think this is the time to completely abandon those more defensive positions. So areas like quality growth we continue to like. You know, sectors like consumer staples and health care we still want to own in a portfolio. And we actually think that the reopening narrative and the choppy economic environment over the short term means that a portfolio should really have some of each and really have some balance.