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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.


Domestic Economy


-7

-5

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-1

1

3

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7

Q12015

Q22015

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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.


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.

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4

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2008

2009

2010

2011

2012

2013

2014

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2017

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2020

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ent

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2010

2011

2012

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2014

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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


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

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20

40

60

80

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140

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2012 2013 2014 2015 2016 2017 2018 2019 2020

Hous

hold

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t to

disp

osab

le

inco

me

ratio

Pers

onal

con

sum

ptio

n, %

Personal consumption Household debt to disposable income ratio


Inflation: Trending low

Core PCE


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.

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1

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Perc

ent c

hang

e fr

om p

rior

yea

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Core PCE Fed core PCE target Average hourly earnings

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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


Housing: Decreased activity

Housing Market


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.

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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


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


High-Frequency Data: Effects of COVID-19

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-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

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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

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-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



Global Economy


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-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


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

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-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


Monetary Policy: More central banks join in on cutting rates

15Sources: International Monetary Fund and Bloomberg. Data as of 7/10/2020.

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US Pola

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ay

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a

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g

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ia

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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


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-16

-14

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-8

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-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

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i Ara

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any

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n

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d St

ates

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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.


Central Banks


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.


0.0

0.2

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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.


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


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


CPI inflation 0.6% 0.5% 2.0%


Eurozone


CPI inflation 0.8% 0.7% 0.9%


Japan


Core CPI inflation (0.5)% 0.4% 0.7%


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


Markets and Performance


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%


Crude Oil 8.15%


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.


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


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


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


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…


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


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


Our Team and Report Authors

Renuka Kumar, CFAHead of SAM Portfolio [email protected]

Eric SouzaSenior Portfolio [email protected]

Jason GraveleySenior ManagerFixed Income [email protected]

Fiona NguyenSenior Credit Risk & Research [email protected]

Jon SchwartzSenior Portfolio [email protected]

Hiroshi IkemotoSenior Fixed Income [email protected]

Tim Lee, CFASenior Credit Risk & Research [email protected]

Jose SevillaSenior Portfolio [email protected]

Paula SolanesSenior Portfolio [email protected]


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.

Investment products and services offered by SVB Asset Management:

© 2020 SVB Financial Group. All rights reserved. SVB, SVB FINANCIAL GROUP, SILICON VALLEY BANK, MAKE NEXT HAPPEN NOW and the chevron device are trademarks of SVB Financial Group, used under license. Silicon Valley Bank is a member of the FDIC and the Federal Reserve System. Silicon Valley Bank is the California bank subsidiary of SVB Financial Group (Nasdaq: SIVB).

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