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Quarterly Economic ReportInside views on economic and market factorsaffecting global markets and business health
Q3 2020
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020 2
Quarterly Economic ReportPublished in Q3 2020 | Data for Q2 2020
3 Overview of Q2 2020
4 Domestic Economy
12 Global Economy
17 Central Banks
22 Markets and Performance
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020
Overview of Q2 2020
3
As we look back on the second quarter of 2020, we can see the constant push and pull of two opposing forces. As states entered various phases of re-opening, the economic green shoots became quite evident and even surprised to the upside. The employment outperformance started in May, when the unemployment rate was expected to worsen from 14.7 percent to 19 percent. The actual figures showed improvement in the rate to 13.3 percent, which continued progress in June to 11.1 percent. You could say that the only important thing to the Fed right now is jobs and the markets were encouraged to see unwavering strength in this area.
The consumer had a very strong quarter in terms of spending as evidenced by the surge in retail sales in the months of May and June. This rebound in spending from an abysmal March and April has been remarkable, but how much of this is on the back of inflated unemployment benefits, which expired in July? And let’s not forget to mention the elephant in the room COVID-19. We are seeing a significant resurgence in the virus, causing re-opening efforts to pause or reverse course for 80 percent of the country. The slowing of higher-risk activities (such as indoor dining) and increased social distancing are likely to have an effect on consumer behavior.
The Fed has committed to being the lender of last resort as it delivered a very clear message: “We’re not even thinking about thinking about raising rates.” The Fed reiterated its commitment to use its balance sheet to purchase US Treasuries, mortgage-backed securities, and even corporate bonds and commercial paper. These programs are underway, and they have been very successful at returning some normalcy to the markets. We still remain conservatively constructive on corporate credit and continue to add value for our clients during these challenging times.
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020 4
Domestic Economy
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020
-7
-5
-3
-1
1
3
5
7
Q12015
Q22015
Q32015
Q42015
Q12016
Q22016
Q32016
Q42016
Q12017
Q22017
Q32017
Q42017
Q12018
Q22018
Q32018
Q42018
Q12019
Q22019
Q32019
Q42019
Q12020
Perc
ent
Personal consumption Gross private domestic investment Net exports Government GDP
Q1 GDP showed that the US economy contracted by 5 percent, marking the beginning of a recession triggered by the global pandemic. In the last revision for Q1 GDP, the upward revision to nonresidential fixed investment was countered by revisions to private inventory overall the revisions were muted. The most meaningful decrease to Q1 GDP came from personal consumption, with a 6.8 percent contraction. Q2 GDP is expected to see a significant contraction, given that it encompasses a longer period of shelter-in-place.
5
GDP: Beginning of a recession
GDP and Components
Sources: Bureau of Economic Analysis, Congressional Budget Office and SVB Asset Management. Data as of 7/3/2020. GDP values shown in legend are percent change vs. prior quarter on an annualized basis.
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020
0
2
4
6
8
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Mill
ions
Unemployment Rate (%)
6
Employment: Reopening uncertainty loomsAlmost 21 million jobs were lost in April, with close to a third regained in the subsequent two months. The unemployment rate peaked at 14.7 percent in April yet improved to 11.1 percent in June as lockdown requirements eased across the US. Despite the relatively quick recovery, uncertainty looms as the effects of the pandemic continue to weigh on businesses.
Initial Jobless Claims: Glimpse of what’s to come
Sources: US Bureau of Labor Statistics, Bloomberg and SVB Asset Management.Data as of 7/3/2020.
Jobless claims
surged in March.
0
2
4
6
8
10
12
14
16
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Perc
ent
200
7
200
8
200
9
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
-25
-20
-15
-10
-5
0
5
10
Mill
ions
Nonfarm Payrolls (in millions)
Unemployment rate at 14.7% in April, then
dropped to 11.1% in June
20.8 million jobs lost in April
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020
5 7 9 11 13 15 17 19 21 23 25
250
300
350
400
450
500
550
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Vehi
cle
sale
s (u
nits
in m
illio
ns)
Reta
il an
d fo
od s
ervi
ces
sale
s
($ in
bill
ions
)
Retail sales excluding vehicles Vehicle sales
7
Consumption: Shift in spending habitsConsumption fell dramatically in Q1, however retail sales rebounded in June due in part to pent-up demand and fiscal stimulus. The pickup in retail spending in June showed a 105 percent increase in apparel and over a 30-percent increase in electronics andfurniture on a month-over-month basis. While the recent data shows a V-shape recovery for retail, there is still a lot of uncertainty as to what the ultimate trends will look like.
Consumption Overview
Sources: Bloomberg and SVB Asset Management. Data as of 7/3/2020.
Retail Sales
0
20
40
60
80
100
120
140
-8
-6
-4
-2
0
2
4
6
2012 2013 2014 2015 2016 2017 2018 2019 2020
Hous
hold
deb
t to
disp
osab
le
inco
me
ratio
Pers
onal
con
sum
ptio
n, %
Personal consumption Household debt to disposable income ratio
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020 8
Inflation: Trending low
Core PCE
Sources: Bloomberg and SVB Asset Management. Data as of 7/3/2020.
Oil Prices
Inflation is expected to remain contained as demand stays centered around certain sectors while the economy works to regain normalcy. Oil prices have recovered from its lows as global suppliers have curtailed production to better align with demand expectations.
0
1
2
3
4
5
6
7
8
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Perc
ent c
hang
e fr
om p
rior
yea
r
Core PCE Fed core PCE target Average hourly earnings
0
1
2
3
4
5
0
20
40
60
80
100
120
140
160
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Pric
e pe
r gal
lon
($)
Pric
e pe
r bar
rel (
$)
Crude oil Daily national average of gasoline prices
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020 9
Housing: Decreased activity
Housing Market
Sources: Bloomberg and SVB Asset Management. Data as of 7/3/2020.
Home Prices
Housing activity has fallen with increased economic and labor market uncertainty. In May, existing home sales fell 9.7 percent, the lowest level since 2010. Home prices continue to stay afloat; however, there may be downward pressure if the economic downturn persists or shelter-in-place mandates resume.
0
2
4
6
8
10
12
14
3
4
5
6
7
8
9
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Hom
e su
pply
(mon
ths)
Hom
e sa
les
(uni
ts in
mill
ions
) Total sales (new & existing) Existing home supply
0
50
100
150
200
250
300
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
$ in
thou
sand
s
Median home price FHFA purchase Case-Shiller 20-City
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020 10
Business Outlook: Uncertainty persistsBusiness sentiment has waned with the pandemic. However, Fed surveys show a relatively quick recovery in June. Given that economic activity hinges on managing the spread of the global pandemic, the second half of the year could slow down again.
Business Confidence Index
Sources: Bloomberg, OECD and Business Confidence Index (BCI) (indicator). DOI: 10.1787/3092dc4f-en (accessed on April 14, 2020). Heatmap colors based on the indices and time periods shown. Data as of 7/3/2020.
Business Sentiment
95
97
99
101
103
105
107
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
U.S. Business Consumer Index Average
Dallas Fed Manufacturing Survey
Philly Fed Manufacturing Survey
New York Fed's Empire Manufacturing Survey
Kansas City Fed Manfacturing Survey
Richmond Fed Manufacturing Survey
ISM Manufacturing PMI SA
ISM Non-Manufacturing
January-19 -0.2 17 3.9 5 -2 55.5 56February-19 11.6 -4.1 8.8 1 16 54.1 58.5
March-19 6.9 13.7 3.7 10 10 54.6 56.3April-19 2 8.5 10.1 5 3 53.4 55.7May-19 -5.3 16.6 17.8 4 5 52.3 56.3June-19 -12.1 0.3 -8.6 0 3 51.6 55.4July-19 -6.3 21.8 4.3 -1 -12 51.3 54.8
August-19 2.7 16.8 4.8 -6 1 48.8 56September-19 1.5 12 2 -2 -9 48.2 53.5
October-19 -5.1 5.6 4 -3 8 48.3 54.7November-19 -1.3 10.4 2.9 -3 -1 48.1 53.9December-19 -3.2 0.3 3.5 -8 -5 47.2 55
January-20 -0.2 17 4.8 -1 20 50.9 55.5February-20 1.2 36.7 12.9 5 -2 50.1 57.3
March-20 -70.1 -12.7 -21.5 -17 2 49.1 52.5April-20 -74 -56.6 -78.2 -30 -53 41.5 41.8May-20 -49.2 -43.1 -48.5 -19 -27 43.1 45.4June-20 -6.1 27.5 -0.2 1 0 52.6 57.1
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020 11
High-Frequency Data: Effects of COVID-19
-120
-100
-80
-60
-40
-20
0
20
Mar-20 Mar-20 Apr-20 May-20 Jun-20
Perc
ent
OpenTable Reservations
Down 60% since shelter-in-place began in March
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
Mar-20 Apr-20 May-20 May-20 Jun-20
Num
ber o
f che
ckpo
ints
TSA Checkpoints
Improving, but still down 64%
0
10
20
30
40
50
60
70
80
Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20
Stringency US Index
Local government easing containment and closure
policies only mildly
-140
-120
-100
-80
-60
-40
-20
0
20
40
Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20
Dallas Fed Mobility and Engagement Index (formerly known as the Social Distancing Index)
As people show quarantine fatigue, their
mobility picks up
Sources: Bloomberg and SVB Asset Management. Data as of 7/13/2020.
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020 12
Global Economy
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020
-12-10
-8-6-4-202
GlobalDevelopedeconomies
Emergingeconomies Euro area US China
Emerging anddeveloping Asia
Latin Americaand the
CaribbeanSub-Saharan
Africa
Estim
ated
real
GDP
202
0An
nual
per
cent
cha
nge
April 2020 estimates June 2020 estimates
13
Global Economy: Deeper recession with a tempered recovery
Source: International Monetary Fund. Data as of 6/24/2020.
Except for China, the global economy is projected to experience a sharper output contraction in 2020…
…before an anticipated rebound in 2021, led by emerging economies in Asia.
0
2
4
6
8
10Global
Developedeconomies
Emergingeconomies Euro area US China
Emerging anddeveloping Asia
Latin America andthe Caribbean
Estim
ated
real
GDP
202
1An
nual
per
cent
cha
nge
April 2020 estimates June 2020 estimates
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020
World Trade Projected to Worsen Before Bouncing Back in 2021
14Source: International Monetary Fund. Data as of 6/24/2020.*Revised 2020 projection, June from April
Goods and Services Trade Volume Change
-15
-10
-5
0
5
10
15
2018 2019 2020 2020* 2021
Perc
ent c
hang
e ye
ar-o
ver-
year
Global Advanced economies Emerging markets and developing economies
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020
Monetary Policy: More central banks join in on cutting rates
15Sources: International Monetary Fund and Bloomberg. Data as of 7/10/2020.
-275
-250
-225
-200
-175
-150
-125
-100
-75
-50
-25
0
25
50
Turk
ey
Braz
il
Mex
ico
Cana
da
US Pola
nd
Norw
ay
Indi
a
Hong
Kon
g
Russ
ia
Sout
h Ko
rea
UK Aust
ralia
Chin
a
Euro
zone
Swed
en
Switz
erla
nd
Japa
n
Sing
apor
e
Denm
ark
Cum
ulat
ive
polic
y ra
te c
hang
e (b
asis
poi
nts)
Total Central Bank Benchmark Interest Rate Changes Since January 2020
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020
-18
-16
-14
-12
-10
-8
-6
-4
-2
0
2014 2015 2016 2017 2018 2019 2020 2020* 2021
Fisc
al a
ccou
nt (%
of G
DP)
WorldAdvanced economiesEmerging markets and middle-income economiesLow-income developing countries
Government Support Programs Expanding Amid a Protracted Recovery
Fiscal Stimulus Contributing to Deeper Fiscal Deficits
16
Fiscal Policy: Governments expand programs to spur demand
*2020 projection, April estimate revised in June.
Source: International Monetary Fund (IMF). Data as of 6/24/2020.
Note: G20 countries. Based on IMF staff estimates as of 6/12/2020.
0
2
4
6
8
10
12
14
Turk
ey
Mex
ico
Indi
a
Russ
ia
Saud
i Ara
bia
Indo
nesi
a
Fran
ce
Arge
ntin
a
Kore
a
Spai
n
Ital
y
Chin
a
Sout
h Af
rica
Cana
da
Unite
d Ki
ngdo
m
Braz
il
Aust
ralia
Germ
any
Japa
n
Unite
d St
ates
Reve
nue
and
expe
nditu
re re
spon
se p
rogr
ams
(% o
f GDP
)
Tax cuts and government payments reflected in negative
projected fiscal accounts.
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020 17
Central Banks
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020
Historical Interest Rates
18
The Fed cut the fed funds rate to zero in March 2020 and remains committed to purchasing assets with an “unlimited” capacity.
Sources: Bloomberg and SVB Asset Management. Data as of 7/14/2020.
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
3.0
Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20
Perc
ent
1-year Treasury yield 2-year Treasury yield Fed funds midpoint
2Q19: The Fed opened the door to possible rate cuts in the June FOMC meeting, noting increased uncertainty and muted inflation, with "crosscurrent" reemerging due to trade frictions escalating.
3Q19: The Fed cut rates consecutively at the July and September FOMC meetings by 25 bps per meeting. The cuts were categorized as insurance cuts against downside risks to the economic outlook.
4Q19: After three consecutive cuts totaling 75 bps, the Fed kept rates unchanged at the December FOMC in the target range of 1.50% to 1.75%. The Fed left the economic outlook unchanged from October and revised the dot plot to show a median committee projection of no rate changes in 2020.
2Q20: Fed projections show rates remaining near zero through 2022. Powell said “not even thinking about, thinking about raising rates.” Risk assets rallied.
1Q20: The Fed cut rates by 150 bps in two surprise meeting sessions driven by the outbreak of COVID-19 in the US.
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020 19
Federal Reserve Board Establishes Emergency Facilities
Sources: Federal Reserve and SVB Asset Management as of 7/17/2020.Views expressed are as of the date of this content only and subject to change.
Facility Summary Size Usage since March 15, 2020
Treasury and MBS Asset Purchases Purchases Treasuries, agency MBS and agency CMBS Unlimited $2,444 billion
Commercial Paper Funding Facility (CPFF) Purchases commercial paper directly from issuers
$10 billion Treasury protection $4 billion
Primary Dealer Credit Facility (PDCF) Allows dealers to borrow cash by pledging collateral TBD $2 billion
Money Market Mutual Fund Liquidity Facility (MMLF)Provides loans to dealers for purchasing securities from prime funds
TBD $21 billion
Secondary Market Corporate Credit Facility (SMCCF) Purchases corporate bonds and ETFs
$750 billion (combined total with PMCCF) $10 billion
Primary Market Corporate Credit Facility (PMCCF) Purchases corporate bonds and loans from eligible issuers
$750 billion (combined total with SMCCF) None
Term Asset-Backed Securities Loan Facility (TALF)
Provides loans to companies collateralized with new-issue ABS, SBA loans, leveraged loans and CMBS
$100 billion $0.3 billion
Foreign and International Monetary Authorities (FIMA) Repo Facility
Accepts Treasuries from eligible authorities TBD $1 billion
Small Business Administration's Paycheck Protection Program (PPP)
Provides loans collateralized by PPP loans by the SBA $350 billion $68 billion
Municipal Liquidity Facility (MLF) Purchases munis from eligible states, counties and cities $500 billion $1.2 billion
Main Street Lending Programs:1. Main Street New Loan Facility (MSNLF) 2. Main Street Expanded Loan Facility (MSELF)3. Main Street Priority Loan Facility (MSPLF)4. Nonprofit Organization New Loan Facility (NONLF)5. Nonprofit Organization Expanded Loan Facility (NOELF)
Provide funding to banks in order to make loans to small- and medium-sized businesses, and nonprofit organizations
$600 billionCombined facilities None
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020
Central Bank Economic Projections
20
Global growth has moderated, though employment has remained strong and synchronous while inflation has remained relatively subdued.
Sources: Federal Reserve, European Central Bank, Bank of Japan and Bank of England. Per National People’s Congress of China, this data is not applicable for China. Data as of 7/14/2020. Forecasts are not available for all periods.
Economic Projections 2020 2021 2022
United States
Change in real GDP (6.5)% 5.0% 3.5%
Core PCE inflation 0.8% 1.6% 1.7%
Unemployment rate 9.3% 6.5% 5.5%
United Kingdom
Change in real GDP (14.0)% 15.0% 3.0%
CPI inflation 0.6% 0.5% 2.0%
Unemployment rate 8.0% 7.0% 4.0%
Eurozone
Change in real GDP (8.7)% 5.2% 3.3%
CPI inflation 0.8% 0.7% 0.9%
Unemployment rate 9.8% 10.1% 9.1%
Japan
Change in real GDP (4.0)% 3.35% 1.2%
Core CPI inflation (0.5)% 0.4% 0.7%
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020
Central Banks: Activating afterburners
21
Analysis
While making no changes at its July meeting, the BOJ emphasized it could expand lending programs, cut interest rates, or take other action in the future.
PBOC did not make any changes in June, after cutting some rates 20 bps in April and cutting RRRs 50 to 100 bps for certain banks earlier in the year.
Added €600 billion to its bond buying program and extended it through mid-2021. Will maintain holdings via reinvestments until at least the end of 2022.
Set minimum monthly purchase amounts of Treasuries at $80 billion and mortgage-backed securities at $40 billion, without an end date.
Increased its QE program by £100 billion to £745 billion. While the nominal amount of the purchase program increased, the pace of purchases will slow.
Easing
CurrentMonetary
Policy
• Policy rate: -0.1%• 10-year JGB target
rate: 0%• QE annual purchases:
¥80 trillion JGB¥12 trillion ETF¥180 trillion J-REIT
• Deposit rate: 1.5%• Lending rate: 4.35%• Loan prime rate: 3.85%• 1-year medium-term
lending rate: 2.95%• Reserve requirement
ratio (RRR): 12.5%
• Refinancing rate: 0%• Marginal lending
facility: 0.25%• Deposit facility: -0.5%• QE: €1,350 billion
program total through mid-2021
• Fed funds target range: 0% to 0.25%
• Interest on excessreserves: 0.10%
• QE: No limit
• Bank rate: 0.10%• QE: Buying £745
billion in gilts and corporate debt
With the COVID-19 pandemic unabated and little room left for rate cuts, central banks are turning on quantitative easing measures and adopting other policies to loosen monetary conditions.
Sources: Bank of Japan, People’s Bank of China, European Central Bank, Bank of England, Federal Reserve Bank and Bloomberg. Data as of 7/15/2020.
2.9%
-0.2%-1.7%
-0.1%
3.7% 2.5% 3.2% 4.4%7.4%
0.3%
-3.1%-0.5%
11.1%
1.0% 0.3% 0.3%3.9%
0.6%
-1.7%
0.1%
U N E M P L O Y M E N T R A T E I N F L A T I O N G D P B E N C H M A R K R A T E
SNAPSHOT OF ECONOMIC DATA
Japan China Eurozone US UK
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020 22
Markets and Performance
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020
Broad Market Performance: “Off the lows”
23
All returns above are on a total return basis. YTD 2020 returns are on an aggregate basis up to 6/30/2020. US Aggregate refers to Bloomberg Barclays Aggregate Bond Index; US Treasuries refers to the US Treasury allocation of the Bloomberg Barclays Aggregate Bond Index; US IG Corps refers to the Investment Grade Corporate allocation of the Bloomberg Barclays Aggregate Bond Index; US High Yield refers to Bloomberg Barclays US High Yield Index; Gold refers to S&P GSCI Gold Index Spot; Crude Oil refers to Spot West Texas Intermediate Crude Oil; Wilshire refers to Wilshire 5000 Total Market Index; REIT refers to MSCI US REIT Index; S&P 500 refers to S&P 500 Index.
Asse
t cla
ss re
turn
s
Sources: Thomson Reuters and Bloomberg Barclays indices.Past index performance is no guarantee of future results.
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 YTD
Gold29.67%
Gold10.23%
REIT 16.47%
Wilshire 33.06%
REIT 28.24%
S&P 500 1.40%
Crude Oil 44.80%
S&P 500 21.80%
US Treasuries0.86%
Crude Oil 35.28%
Crude Oil 91.75%
REIT26.97%
US Treasuries9.81%
Wilshire 16.05%
S&P 500 32.39%
S&P 500 13.69%
REIT 1.30%
US High Yield 17.13%
Wilshire 21.00%
US Aggregate 0.01%
S&P 500 31.49%
Wilshire 21.94%
Wilshire 17.18%
US IG Corp8.15%
S&P 500 16.00%
US High Yield 7.44%
Wilshire 12.70%
US Treasuries0.84%
Wilshire 13.40%
Gold 13.70%
US High Yield -2.08%
Wilshire 31.02%
S&P 500 20.54%
US High Yield 15.12%
Crude Oil 8.15%
US High Yield 15.81%
Crude Oil 7.32%
US IG Corp7.46%
Wilshire 0.70%
S&P 500 12.00%
Crude Oil 12.50%
Gold-2.10%
REIT 24.33%
Gold12.77%
Crude Oil 15.10%
US Aggregate 7.84%
US IG Corp9.82%
REIT 1.26%
US Aggregate 5.97%
US Aggregate 0.55%
Gold 8.60%
US High Yield 7.50%
US IG Corp-2.51%
Gold18.87%
REIT 11.39%
S&P 500 15.06%
REIT 7.48%
Gold 6.96%
US IG Corp-1.53%
US Treasuries5.05%
US IG Corp-0.68%
REIT 7.10%
US IG Corp6.42%
S&P 500 -4.40%
US IG Corp14.54%
US Treasuries8.71%
US IG Corp9.00%
US High Yield 4.98%
US Aggregate 4.21%
US Aggregate -2.02%
US High Yield 2.45%
US High Yield -4.47%
US IG Corp6.11%
REIT 3.70%
Wilshire -5.30%
US High Yield14.32%
US Aggregate6.14%
US Treasuries5.87%
S&P 500 2.11%
US Treasuries1.99%
US Treasuries-2.75%
Gold -1.51%
Gold -10.50%
US Aggregate 2.65%
US Aggregate 3.54%
REIT -5.80%
US Aggregate8.72%
US IG Corp5.02%
US Aggregate 6.54%
Wilshire 0.98%
Crude Oil -7.08%
Gold -28.26%
Crude Oil -45.76%
Crude Oil -30.50%
US Treasuries1.04%
US Treasuries2.31%
Crude Oil -25.30%
US Treasuries6.86%
US High Yield-3.8%
The unconventional Fed facilities, along with the other monetary and fiscal policy responses, have helped improve financial markets ranging from bonds to equities all have come off their late-March lows.
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020
Fixed Income Returns
24
High-grade corporate returns outpaced other asset classes as credit spreads significantly tightened in Q2 from their widest levels in late March. The rally in spreads can be attributed to the unprecedented support from the Fed with the unconventional liquidity facilities, and the US government’s fiscal stimulus packages.
Sources: Bloomberg Barclays indices. Data as of 6/30/2020. Heatmap colors based on periodic return percentage for time period shown. Past performance is not a guarantee of future results.
*Annualized periodic return data
2020* 2019 Q2 20 Q1 20 Q4 19 Q3 19 Q2 19 Q1 19
US Treasuries 7.15 0.50 8.71 6.86 0.48 8.20 -0.79 2.40 3.01 2.11
US Agencies 3.73 0.72 5.06 5.89 0.88 4.14 -0.09 1.74 2.32 1.81
Corporates 8.54 2.19 5.02 14.54 8.98 -3.63 1.18 3.05 4.48 5.14
US MBS 2.07 1.36 3.50 6.35 0.67 2.82 0.71 1.37 1.96 2.17
US ABS 2.11 0.85 3.32 4.53 3.54 -0.21 0.39 0.92 1.67 1.48
US CMBS 5.33 1.72 5.19 8.29 3.95 1.19 -0.33 1.89 3.28 3.24
1-3 Year US Treasuries 1.93 0.17 3.01 3.59 0.25 2.76 0.51 0.58 1.47 0.99
1-3 Year US Agencies 1.52 0.39 2.42 3.58 0.46 1.95 0.55 0.66 1.32 1.01
1-3 Year Corporates 1.92 1.00 2.48 5.30 4.07 -1.53 0.86 0.96 1.55 1.83
<1 Year Corporates 0.56 0.83 1.28 3.09 1.39 -0.11 0.58 0.68 0.85 0.94
AAA Credit Card ABS 2.47 0.63 3.90 4.63 3.46 0.43 0.27 1.02 1.78 1.49
AAA Auto ABS 1.80 0.75 3.00 4.21 3.18 -0.17 0.48 0.77 1.50 1.39
Current Yield %
Annual Total Return % Non-annualized Periodic Total Return %
US Aggregate Index
US Short Duration
Current Duration
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020
New Issues Keep Coming
25
New issuance through Q2 for US investment grade (IG) corporates has surpassed 2019 volume with six months to go. The non-financial new-issue volumes doubled financial issuers as of the end of Q2. Nearly 70 percent have been over six years, while 80 percent of the volume came from A-rated to BBB-rated borrowers.
Sources: Bloomberg Barclays indices. Data as of 6/30/2020. Past performance is not a guarantee of future results.
372.1508.3 492.2
658.4 659.1 630.3
855.9 810.3 857.0
1,062.7 1,084.1 1,136.7
921.4993.4
1,119.5
0
500
1,000
1,500
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 YTD
$ in
bill
ions
US Investment Grade Corporate New-Issue VolumeIndustrial Utility Financial
IG Corporate New Issue Supply (Sector/Maturity)
3%
22%
19%
13%
7%
14%
14%
8%
13%
40%
35%
33%
45%
39%
35%
46%
55%
30%
40%
51%
33%
13yr+
6-12yr
1-5yr
13yr+
6-12yr
1-5yr20
19Q2
202
0
(Rating %)
Aaa Aa A Baa
IG Corporate New-Issue Supply (Rating %/Maturity)
Q2 2020 volume surpassed 2019
$228
$401
$364
$282
$479
$359
0.0 100.0 200.0 300.0 400.0 500.0
13yr+
6-12yr
1-5yr
13yr+
6-12yr
1-5yr
2019
Q2 2
020
($ in billions)
Industrials Financial Utility
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020
Corporates: Debt growth and corporate spending
26Source: Bloomberg. Data as of 6/30/2020.
S&P 500 Capital Spending and Distribution
S&P 500 Leverage and Debt Coverage
Net leverage declined since last quarter due to increasing cash balances while free cash flow coverage was relatively unchanged. Corporate spending on capital expenditure and share buyback has tapered off.
1.71
0
2
4
6
8
10
12
14
16
0.0
0.5
1.0
1.5
2.0
2.5
Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20
Free
cas
h flo
w to
deb
t rat
io, %
Net d
ebt t
o EB
ITDA
ratio
Net debt/EBITDA FCF/Debt
0
10
20
30
40
50
60
70
80
90
100
Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20
$ pe
r sha
re
Dividend Buyback Capital expenditure
2Q20: Net leverage declined with FCF coverage relatively unchanged
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020
Corporates: Operating margin and debt coverage
27Source: Bloomberg. Data as of 6/30/2020.
S&P 500 Industrial Index
S&P 500 Financial Index
Operating margin declined in two major sectors due to COVID-19 impacts. However, debt coverage showed a notable contrast as the financial sector benefited from increased liquidity.
0
2
4
6
8
10
12
14
16
18
89
101112131415161718
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Free
cas
h flo
w (F
CF) t
o de
bt ra
tio, %
EBIT
DA m
argi
n, %
EBITDA Margin FCF/Debt
-10
-5
0
5
10
15
20
25
30
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20200
10
20
30
40
50
60
70
80
90
Oper
atin
g m
argi
n, %
Cash
to d
ebt r
atio
, %
Cash/Debt Operating margin
…operating margin declined
Q2: Debt coverage shows increase, whereas…
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020 28
Credit Spreads UpdateFront-end spreads have narrowed significantly since late March with the double-A and single-A indexes returning to levels seen at the beginning of the year. Credit continues to offer attractive yields relative to comparable Treasury maturities.
Sources: Bloomberg, Barclays Capital and SVB Asset Management. Data as of 6/30/2020.Views expressed are as of the date of this content only and subject to change.
Bloomberg Barclays Short-Term Indexes (1-year maximum maturity) Spread Changes
0
100
200
300
400
500
600
700
12/31/19 1/14/20 1/28/20 2/11/20 2/25/20 3/10/20 3/24/20 4/7/20 4/21/20 5/5/20 5/19/20 6/2/20 6/16/20 6/30/20
Spre
ad o
ver U
S Tr
easu
ries
(bps
)
AA Index A Index BBB Index
12/31/19 1/31/20 2/28/20 3/23/20 4/30/20 5/29/20 6/30/20AA Index 29 25 47 235 64 25 21A Index 43 35 65 405 109 50 36BBB Index 65 57 94 639 235 141 93
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020
Relative Value: Government yields projected to remain low
29
Short-Term Treasury and government money market fund yields track very closely to the federal funds rate. The Fed is projecting no rate changes through 2022. Credit offers attractive yields relative to comparable Treasury maturities and money market funds in a low-interest-rate environment.
Source: SVB Asset Management and Bloomberg. Data as of 6/30/2020. Past performance is not a guarantee of future results. The above is not to be construed as a recommendation for your particular portfolio.
Bloomberg Barclays Short-Term Indexes (0 to 12 month maturities)
0
1
2
3
4
5
6
12/31/19 1/14/20 1/28/20 2/11/20 2/25/20 3/10/20 3/24/20 4/7/20 4/21/20 5/5/20 5/19/20 6/2/20 6/16/20 6/30/20
Yiel
d-to
-wor
st, %
Fed Funds Rate Treasury Index Corp Index
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020 30
Our Team and Report Authors
Renuka Kumar, CFAHead of SAM Portfolio Managementrkumar@svb.com
Eric SouzaSenior Portfolio Manageresouza@svb.com
Jason GraveleySenior ManagerFixed Income Tradingjgraveley@svb.com
Fiona NguyenSenior Credit Risk & Research Officerpnguyen@svb.com
Jon SchwartzSenior Portfolio Managerjschwartz@svb.com
Hiroshi IkemotoSenior Fixed Income Traderhikemoto@svb.com
Tim Lee, CFASenior Credit Risk & Research Officertlee@svb.com
Jose SevillaSenior Portfolio Managerjsevilla@svb.com
Paula SolanesSenior Portfolio Managerpsolanes@svb.com
0820-0215MS-033121SVB Asset Management | Quarterly Economic Report Q3 2020
Are not insured by the FDIC or any other federal government agency
Are not deposits of orguaranteed by a bank May lose value
31
Views expressed are as of the date of this report and subject to change. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. This information should not be viewed as tax, investment, legal or other advice, nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction.
None of this material, nor its content nor any copy of it, may be altered in any way, transmitted or distributed to any other party without the prior express written permission of SVB Asset Management. Intended for institutional use only. SVB Asset Management is a registered investment advisor and nonbank affiliate of Silicon Valley Bank, and member of SVB Financial Group. For institutional purposes only.
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