Fed intervention has improved market function in Treasuries, agency MBS and money markets. In addition, there are some signs of stability in High Grade credit. During the month of March, U.S. high grade bond issuance hit a record $262 billion and secondary bond trading volume was also a monthly record at $29.4 billion per day. However, the recovery has been uneven with lower-rated Emerging Markets and High Yield lagging.

The U.S. hospital industry generates ~$100 billion of revenues per month and the CARES Act includes a 20% Medicare inpatient prospective payment system (IPPS) reimbursement bump for COVID-19 patients, 2% overall Medicare sequestration relief for eight months, Medicaid Federal Medical Assistance Percentages (FMAP) increases amended from Phase II that may or may not translate into rate improvements and a $100 billion “provider” relief fund to reimburse for expenses and lost revenues. If hospital revenues were to decline by 50%, the fund could be consumed by claims for lost revenue alone within two months (excluding any costs related to a building surge in capacity of beds and supplies). Further, the relief fund is not limited to hospitals; it appears doctors, clinics, ambulatory surgery centers (ASCs), nursing homes, labs and more would all be eligible.

“The stimulus bill is not enough as hospital revenues are declining much faster than expected; we expect deferred procedures to exceed actual virus treatment costs, hurting hospitals but benefiting managed care,” said Gary Taylor, Hospital and Managed Healthcare analyst, adding that “the Medtech space will be most adversely impacted as elective and postponable procedures are likely to take a sizeable hit, and the crisis will materially accelerate the shift to value-based-care arrangements for physicians.”

While corporate debt spreads are at post-crisis highs, and corporates have drawn on bank revolvers up to $333 billion as of April 14, U.S. Global Systemically Important Banks (GSIBs) issued $41 billion during the month of March, and we believe GSIBs could add $15-20 billion if markets remain stable to build buffers.

“Large cap banks are much better positioned this time, with much higher capital and liquidity as well as lower risk, with subprime and leveraged loans down,” noted U.S. Large-Cap Banks analyst Vivek Juneja.

However, U.S. small- and mid-cap banks are unlikely to take advantage of the option to delay Current Expected Credit Loss (CECL) implementation. “Even though we were initially very optimistic that the delay of CECL could be a huge benefit to bank stocks, as well as the economy, we now actually see very low odds that the banks take this option to delay,” said Steven Alexopoulos, U.S. Small- and Mid-Cap Bank analyst, adding, “Moreover, similar to the TARP (Troubled Asset Relief Program) approvals in the 2008/2009 timeframe, we see a very similar situation in which banks will not want to stand out from the pack when it comes to taking the option to delay the implementation of CECL.”

Mortgage refinancing (refi) demand remains robust as existing borrowers are still reacting to lower rates. However, cancelled house viewings and economic uncertainty are weighing on purchase demand. Overall purchase application demand has declined 20-25 percent year-over-year, and the downturn has been particularly sharp in states with early COVID-19 lockdowns.

The CARES Act requires forbearance on government-backed loans to last at least six months and up to a year. Due to job losses or furloughs, a sizeable chunk of the borrower population will soon be missing payments, likely preventing them from refinancing their mortgages, at least temporarily. In addition, refinancing activity could also be disrupted by lingering effects on the originator community.

“Looking ahead, we assume a 30% disruption to refi closings in the near term and a much weaker purchase market,” said Matthew Jozoff, Co-Head of Fixed Income Research. “Over the medium term, income disruptions are likely to leave a dent in home purchases, while home price depreciation and tighter underwriting standards will likely suppress cash-out refinancing activity.”

The spread of COVID-19 across the U.S. has temporarily shuttered auto production and similarly impacted a large portion of the U.S. economy, which has significantly lowered the outlook for vehicle sales in 2020. Asset roll-off should exceed debt maturities in 2020, while captive finance assets, comprised mainly of auto loans and leases and dealer floorplan financing, are short-term in nature. During the Global Financial Crisis, the Federal Reserve’s TALF (Term Asset-Backed Securities Loan Facility) program, announced November 2008, was effective in re-opening the asset-backed lending market for borrowers. The TALF program provides loans to borrowers against eligible asset-backed securities (ABS) collateral. It is designed to reinvigorate investor appetite for this important source of consumer credit and will make $100 billion of such loans available. At a time when unsecured funding costs have become uneconomical, we think the renewal of this Fed program will enable efficient funding for Ford Credit and GM Financial in the ABS market.

“TALF 2.0 is a welcome development from an ABS funding perspective,” commented Avi Steiner, High Yield Broadcasting & Publishing and Automotive analyst and Jonathan Rau, High Grade Autos & Auto Parts and Basic Industries analyst. “We expect these companies to rely heavily on the ABS market for future funding needs.”

A key difference between 2008 and 2020 is both the trajectory and absolute level of gasoline prices. The current direction and absolute level of gas prices should, all else equal, be supportive of a consumer preference for trucks and SUVs.