In an extraordinary attempt to help the economy in the midst of a pandemic-driven economic downturn, the Federal Reserve’s balance sheet is now over $6 trillion.
How this has impacted fixed income pricing, yield, risk and even bond trading is the subject of this week’s Masters in Business interview. We speak with John R. Mousseau, president, chief executive officer and director of fixed income at Cumberland Advisors. Mousseau is also co-author of the book “Adventures in Muniland: A Guide to Municipal Bond Investing in the Post-Crisis Era.”
He notes the current crisis is very different from the 2008-09 crisis. That event was driven (at least at first) by credit deterioration and defaults. It was only in the latter stages where the defaults scaled up so quickly the bond markets developed liquidity problems post Lehman Brothers collapse. In the fixed income world today, the Coronavirus pandemic is characterized mostly by economic paralysis and liquidity freezing, but not defaults (yet).
The recent bond market turmoil was driven not by fundamentals but by the 35% crash in stocks. People sell what they can. not what they want to, when they are desperate to raise cash.
Mousseau explains why credit quality is always relative, and what this means for total return bond management. He describes the bond market like a ship, hit by a torpedo but still sailing on, with the support of Congressional fiscal stimulus and the Fed’s monetary stimulus. He believes high quality general obligation Municipals bonds will be fine.
His favorite books are here; A transcript of our conversation is available here.
You can stream and download our full conversation, including the podcast extras, on Apple iTunes, Spotify, Overcast, Google, Bloomberg, and Stitcher. All of our earlier podcasts on your favorite pod hosts can be found here.
Next week, we speak with James Montier, a member of GMO’s Asset Allocation team. Prior to joining GMO in 2009, he was co-head of Global Strategy at Société Générale. He is the author of several books including “Behavioural Investing: A Practitioner’s Guide to Applying Behavioural Finance”; “Behavioural Finance: Insights into Irrational Minds and Markets” and “The Little Book of Behavioural Investing.”
