FIXED INCOME COMMENTARY

Credit markets endured significant stress during the first quarter. On a high level, investors quickly tried to sell
all types of credit instruments and go to cash. This behavior created a negative feedback loop where
indiscriminate selling caused lower prices, which led to more selling and so on. During the worst week,
investors were not even able to transact in AAA munis and corporate bonds. Lower rated and less liquid forms
of credit were hit even harder such as preferred stocks, high yield bonds, and non government backed
mortgages. Fearing even lower prices, banks moved quickly to pull repo lines causing forced selling from
mortgage REITs and other levered investors. The frozen nature of the credit markets spurred the Federal
Reserve to take measures to stabilize markets. Despite the cries of moral hazard, the Fed’s purchasing of
corporate bonds has created a backstop in the system which has allowed corporations to return to the debt
issuance market. All is not well however. Despite various areas of the credit market recovering, numerous
spaces are still dislocated and well below levels seen in February. Housing related debt has sold off rapidly as
investors grapple with how many borrowers decide to forbear on their mortgage and rent payments. Similarly,
corporations which have debt outstanding are in a stressed position with profitability strained during the
shutdown. A lot of the outcomes will hinge on how long the shutdown lasts, and when some degree of normalcy
returns. In this environment we favor high grade corporate debt, and housing related debt with low loan to
values and strong collateral support.

Municipal bonds also had a volatile month, falling an average of 7.5% in mid-March and rallying back post
government intervention to close down 1% for the quarter. Meanwhile, US treasury yields plunged on the
quarter with the 10y yield falling from 1.91% at year end to 0.67% at quarter end. Similarly, the 2y US treasury
yield fell from 1.57% at year end to 0.25% at quarter end. This dramatic drop in yields reflects the Fed cutting
the overnight funds to rate down to 0.25% and also the likelihood that rates stay at this level for the foreseeable
future. In summary, risk free yields fell dramatically while any type of fixed income with a credit spread
widened rather significantly as investors begin to price the longer run ramifications of the pandemic.