WEBVTT

1
00:00:07.680 --> 00:00:11.580
<v 0>The COVID-19 pandemic and the turmoil in financial markets has made the past few</v>

2
00:00:11.580 --> 00:00:14.520
weeks a challenge for everyone. Like most businesses,

3
00:00:14.550 --> 00:00:16.740
we've implemented a pandemic response plan,

4
00:00:16.950 --> 00:00:19.290
which means our entire team is now working remotely.

5
00:00:19.710 --> 00:00:22.440
But that doesn't mean that things have slowed down; on the contrary,

6
00:00:22.620 --> 00:00:26.610
it's full speed ahead, and our team continues to be very active in the markets,

7
00:00:26.730 --> 00:00:30.720
finding a lot of value in credit. To talk a little bit more about that,

8
00:00:30.720 --> 00:00:33.060
I'm joined by my friend and colleague, Brian Carney,

9
00:00:33.300 --> 00:00:36.510
who's a portfolio manager here at Canso Investment Counsel. Brian,

10
00:00:36.690 --> 00:00:37.290
good afternoon.

11
00:00:37.290 --> 00:00:39.020
<v 1>Good afternoon, Jhordan. Thanks for having me.</v>

12
00:00:39.130 --> 00:00:42.510
<v 0>Good to have you. Brian, I wanted to start off by looking at the numbers.</v>

13
00:00:42.510 --> 00:00:45.540
We know that as yields fall, prices rise,

14
00:00:45.810 --> 00:00:49.230
which might imply that credit would have done well recently. I wonder,

15
00:00:49.230 --> 00:00:52.560
is that the case? And if not, how do we reconcile the two?

16
00:00:53.160 --> 00:00:57.480
<v 1>Not so fast, Jhordan. It is true that if yields fall, prices rise.</v>

17
00:00:57.990 --> 00:00:59.280
But the reality is,

18
00:00:59.790 --> 00:01:03.510
in times of crisis and catastrophe like we've been in,

19
00:01:04.500 --> 00:01:08.370
not all parts of the fixed-income markets react the same way.

20
00:01:08.970 --> 00:01:13.860
And so we've actually seen dramatic selloffs in both investment-grade and

21
00:01:13.860 --> 00:01:17.220
high-yield credit. So at one point in March,

22
00:01:17.370 --> 00:01:20.370
U.S. investment-grade credit was down over 10%,

23
00:01:21.000 --> 00:01:25.530
U.S. high yield down over 20%. Now,

24
00:01:25.710 --> 00:01:27.420
since those lows,

25
00:01:27.600 --> 00:01:32.310
there've been a number of announcements by federal governments and central

26
00:01:32.310 --> 00:01:35.880
banks that have helped to stabilize the market. And in fact,

27
00:01:36.450 --> 00:01:40.170
those markets have recovered somewhat. But all in all,

28
00:01:40.410 --> 00:01:43.950
if you were invested in corporate credit, it was a negative month for you.

29
00:01:44.250 --> 00:01:48.720
<v 0>Brian, let's focus on treasury yields for a moment. In times of crisis,</v>

30
00:01:48.720 --> 00:01:52.380
we normally see a flight to quality, which would drive yields down.

31
00:01:53.700 --> 00:01:55.020
Is that something we're seeing now?

32
00:01:55.470 --> 00:02:00.450
<v 1>We have seen that, Jhordan. And in periods of crisis,</v>

33
00:02:00.450 --> 00:02:05.220
as people are selling equities or selling investment-grade

34
00:02:05.220 --> 00:02:09.420
high-yield bonds or other securities they perceive as having more risk,

35
00:02:09.720 --> 00:02:12.450
oftentimes they're buying government bonds,

36
00:02:12.450 --> 00:02:17.100
which are perceived as the safest or more risk-free assets.

37
00:02:17.160 --> 00:02:21.900
So that supply-demand dynamic has certainly been in

38
00:02:21.900 --> 00:02:25.230
play in the U.S. and Canadian government bond markets,

39
00:02:25.230 --> 00:02:29.400
where at one point we actually had 30-year government bond yields in both

40
00:02:29.400 --> 00:02:32.700
countries well below 1%. Now,

41
00:02:32.700 --> 00:02:37.410
what we've seen subsequent to that is a rise in

42
00:02:37.410 --> 00:02:39.420
yields, still at very low levels,

43
00:02:39.630 --> 00:02:44.430
but as the markets have come to understand that the public policy

44
00:02:44.430 --> 00:02:48.930
announcements by both governments and the central banks will lead to

45
00:02:49.260 --> 00:02:53.730
significantly increased deficits and more supply of government bonds.

46
00:02:54.240 --> 00:02:59.190
The markets have started to realize that sub-1% on 30-year government

47
00:02:59.200 --> 00:03:01.720
debt is probably not where they want to be.

48
00:03:02.500 --> 00:03:03.880
<v 0>Brian, as you mentioned earlier,</v>

49
00:03:03.910 --> 00:03:06.640
credit returns were decidedly negative in March.

50
00:03:07.030 --> 00:03:09.490
Does that mean that investors should be looking elsewhere,

51
00:03:09.670 --> 00:03:12.910
or is there now an opportunity to be had in fixed income?

52
00:03:13.690 --> 00:03:14.050
<v 1>Jhordan,</v>

53
00:03:14.050 --> 00:03:18.400
we think there's a real opportunity in the credit portion of the fixed-income

54
00:03:18.400 --> 00:03:22.720
markets, and we've got a couple of charts which we think

55
00:03:22.720 --> 00:03:24.130
highlights this. So,

56
00:03:24.430 --> 00:03:27.850
if you look at U.S. investment-grade spreads,

57
00:03:28.450 --> 00:03:32.560
we haven't seen levels like this since the credit crisis. Now,

58
00:03:32.590 --> 00:03:34.570
they were a little bit wider in the credit crisis,

59
00:03:34.570 --> 00:03:37.840
but if you look back over 20-odd years of history,

60
00:03:38.350 --> 00:03:41.740
this is one of the best opportunities there's been,

61
00:03:41.740 --> 00:03:44.710
and that if you move to U.S. high yield, again,

62
00:03:45.130 --> 00:03:49.360
we haven't seen levels like this since the early days of the credit crisis. So,

63
00:03:49.780 --> 00:03:53.950
investors need to do their homework because you're lending money to individual

64
00:03:54.340 --> 00:03:57.220
companies, so you need to understand the companies you're lending to. But,

65
00:03:57.220 --> 00:03:59.290
when you look at the markets in aggregate,

66
00:03:59.770 --> 00:04:04.630
we think this is an incredible opportunity to be buying corporate debt,

67
00:04:05.890 --> 00:04:10.840
with the caveat that you buy corporate debt if you believe that there will be

68
00:04:10.840 --> 00:04:13.000
a solution at some point to COVID-19.

69
00:04:13.000 --> 00:04:17.890
And we at Canso believe as dire as the situation has appeared,

70
00:04:17.890 --> 00:04:21.070
at some point we will come out of this,

71
00:04:21.340 --> 00:04:25.240
and there will be companies that come out of it, and they will be viable.

72
00:04:25.450 --> 00:04:28.480
And those are the types of companies that you want to lend to.

73
00:04:28.510 --> 00:04:31.930
We think it's an extraordinary opportunity and,

74
00:04:32.950 --> 00:04:35.560
investors, there will be opportunities in other markets.

75
00:04:35.560 --> 00:04:37.600
But certainly the credit markets are worth a look.

76
00:04:38.020 --> 00:04:39.820
<v 0>That's good information, Brian. And that's it for me,</v>

77
00:04:39.820 --> 00:04:41.230
so thank you for your time.

78
00:04:42.460 --> 00:04:43.720
<v 1>Thank you, Jhordan. Be safe.</v>

79
00:04:44.920 --> 00:04:46.120
<v 0>For more information,</v>

80
00:04:46.150 --> 00:04:50.260
please visit cansofunds.com and check out the April Market Observer.