"The new coronavirus has disrupted the world, and it's certainly been a difficult stretch for investors," says Jeff Moore, co-portfolio manager of Fidelity® Investment Grade Bond Fund.
"But I do think investors should take some comfort that we've encountered periods of very high volatility before—and that we've designed our portfolio to handle them."
Moore emphasizes it's historically normal to see brief, intense stretches of volatility interrupting long periods with little volatility. In the past 25 years, for example, bond markets endured the bankruptcy of Long-Term Capital Management (1998), Y2K, the Enron and WorldCom bankruptcies (2002), and the financial crisis of 2007–2008.
The fund's investment team learned a valuable lesson after the financial crisis—it highlighted the need for more rigorous stress testing of the portfolio for various potential negative scenarios in the future.
"We didn't necessarily anticipate the full extent of the disruption and global economic impact of COVID-19," Moore says. "But due to our past experience dealing with high-volatility events, we do feel fully prepared to manage through this difficult stretch, and we fully expect to emerge from the other side of this crisis ready to take advantage of available opportunities."
Early in 2020, Moore and his co-portfolio manager, Michael Plage, accelerated their reduction in the fund's credit risk in the face of narrowing spreads and boosted their overweighting in US Treasurys, emphasizing long-duration issues they believed would benefit to a greater extent from Federal Reserve rate cuts.
They also remained patient by avoiding an aggressive move into the market at the initial signs of volatility.
As of March 31, Moore says he sees a large investment opportunity set and meaningful yield improvement following extreme volatility in mid-March. A record $260 billion in investment-grade corporate bonds priced in the final month of the quarter at very wide spreads. At quarter-end, amid very-low risk-free yields, the fund remained overweighted risk assets outside the energy sector.
Investing in bonds involves risk, including interest rate risk, inflation risk, credit and default risk, call risk, and liquidity risk.
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