Governments and health authorities have long anticipated the real danger of a second wave but few predicted it would hit with the rapidity and ferocity witnessed in recent months.
The speed and scale prompted an urgent effort. Soaring COVID-19 case numbers forced the majority of European countries to once more re-impose movement restrictions. Although the restrictions imposed were less strict, when compared to those introduced earlier this year, doubts on a continued economic recovery resurfaced.
Although markets were left depressed following government announcements of fresh movement restrictions, the news surrounding the coronavirus vaccine trials particularly that of Pfizer’s efficacy, bode well.
Euro sovereign yields, portraying the increased uncertainty on the idea of renewed restrictions and thus negative impact on an economic recovery, turned momentarily higher as optimism prevailed. US treasuries, then fenced by the results of the presidential election which failed to show a clear winner between incumbent President Donald Trump and former Vice President Joe Biden, also pointed higher on the news.
Corporate credit spreads, previously witnessing substantial widening (reaching significant highs of over 1000bps) as concerns about their ability to service their debt mounted, tightened. Sectors proving more vulnerable at the peak of the pandemic, outperformed.
Leisure: With the COVID-19 pandemic seemingly back to full force in October, spreads of corporates within the leisure industry significantly widened. Although the restrictions imposed were less strict, when compared to those introduced earlier this year, a continued downturn within the sector was inevitable. As the coronavirus vaccine news came in, high yield names within the industry benefitted, with credit spreads witnessing substantial tightening. European high yield names within the sector witnessed spread tightening of 239 bps, in November and a further 29 bps in the first week of December.
Transportation: Against a backdrop of the industry seemingly recovering from treacherous waters at the peak of the pandemic and the notion of a coronavirus vaccine being widely available in H1 2021, the transportation industry recorded substantial tightening, leading to notable gains. An improvement in industry metrics, such as load factor – an indicator used by airlines to measure the per centage of available seating capacity that is filled with passengers, and freight rate – the price at which a cargo is transported from one point to another, portraying increased demand, instilled further optimism.
Energy: The sector, strongly depressed at the beginning of the year, has over the past few weeks registered strong gains as vaccine optimism boosted hopes for a sustained recovery in economic activity and energy demand. The upward move in crude prices correlated to the improved macroeconomic conditions led to significant spread tightening, with US Energy names registering spread tightening of 220 bps in November and first week of December.
Going forward, we believe that the downward reversal in yields should in the coming months continue to prevail. COVID-19 sensitive sectors should continue to outperform as the vaccine roll-out takes centre stage in the initial days of 2021.
Undoubtedly, corporate yields shall continue to be aided by easing measures, both fiscal and monetary, which proved imperative to ease volatility during 2020.
Disclaimer: This article was written by Christopher Cutajar, credit analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.
For more information visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.