Date: 17th April 2020

Analyst: David Paul, Charles Piralli

Fixed Income

What has been happening internationally?

In our 2020 outlook earlier this year, we made mention of the US yield curve

inversion in 2019, and how its occurrence has preceded each of the last 7

recessions in the US dating back to 1950. 3 months later and the yield curve

inversion is looking like it is going to be 8 for 8, with a recession all but

confirmed as measures to ensure “social distancing” to combat COVID-19

have had a devastating effect on economic activity.

In response to the current and expected economic weakness, the US has

unleashed a historic amount of stimulus on both the fiscal and monetary

side.

What are the monetary policy actions?

The Federal Reserve cut rates by 50 basis points and then 100 basis points

in the first half of March outside of its regularly scheduled meetings as

equity markets tumbled 20% in just 17 trading sessions. The cuts served to

steepen the yield curve, as the effect on the “short” end of the curve (1

month treasuries down 150 bps) was much more pronounced than the

“long” end (30 year treasuries down 65 bps). Yields on maturities greater

than 6 months started falling after the market peaked on February 19th, as

the same forces which brought equities lower, pushed bond prices higher

(and yields lower) as investors rushed into treasuries to protect their

capital.

What has been happening internationally? (continued)

Figure 1. Shift and steepening of US yield curve Source: Bloomberg

In addition, the Fed also announced a range of measures to increase liquidity in the system, the major ones being:

➢ Lowered the interest rate on excess reserves (IOER) to 0.10%; lowered the primary credit rate by 150 basis points to 0.25%

➢ Reduced the reserve requirement for many banks to zero ➢ Announced and then expanded quantitative easing (QE) from $700 billion to “the amount needed” ➢ Announced it would take the unprecedented action of buying corporate debt (investment grade as

well as high-yield under specific conditions) through its Primary Market Corporate Credit Facility and Secondary Market Corporate Credit Facility. The facilities allow the Fed to purchase up to $750B in eligible bonds and US-listed ETF’s which provide broad corporate bond exposure.

➢ Reinitiated Term Asset-Backed Securities Loan Facility and announced Money Market Mutual Fund Liquidity Facility and Commercial Paper Funding Facility

These last 3 measures were tailored specifically for credit markets, which saw bid-ask spreads (the difference between the bid yield and the ask yield) diverge sharply as traders struggled to buy and sell bonds quickly. This was because as liquidity dried up, buyers demanded additional yield in order to purchase bonds from sellers, since the buyers foresaw difficulty in being able to sell the bonds in the future. With the Fed then stepping in to purchase bonds, spreads narrowed and the market is able to operate more efficiently.

Across the pond, the European Central Bank announced the Pandemic Emergency Purchase Program (PEPP), which includes purchasing up to €750 billion ($820bn) in bonds this year across sovereign debt (including Greek bonds), corporate debt, and non-financial sector commercial paper. ECB also said European banks would be able to borrow money with an interest rate of -0.75%, essentially paying them to take money and lend it to businesses and individuals. The ECB however, left its main rate at -0.5% as previous rate cuts had limited its ability to stimulate the economy through further cuts. They also acknowledged the limitations of monetary policy and that governments also had a significant role to play during the crisis.

What has been happening internationally? (continued)

What are the fiscal policy actions?

Following the array of initiates announced by the Fed, Congress passed, and President Trump signed the Coronavirus Aid, Relief and Economic Security (CARES) Act. The act approved a $2 trillion stimulus package including direct payments and loans to individuals and businesses, allocated funds to state and local governments to cope with the crisis as well as direct spending on healthcare. Members of both the White House and Congress have also indicated their willingness to approve further funding if the crisis persists longer than currently projected.

The measures in the CARES act, apart from the funding to directly combat the virus, are intended to keep businesses afloat and keep their employees on payroll at a time when the economy is basically shutdown and businesses have no income to meet expenses. In addition, direct payments of ~$1,200 are being made to every eligible American citizen based on income instead of a more targeted measure, as lawmakers recognize that the speed of their stimulus implementation is just as important as its size.

How has the corporate bond market reacted?

The corporate bond market has seen its fair share of selling as well. In theory, stocks are seen as risky assets and

bonds are seen as safer assets. This assumes that all stocks are the same and all bonds are the same which clearly

is not true. Bonds can be separated into various categories known as their credit quality, which we gauge using

their credit rating. The higher the rating, the safer the bond. The table below lists the credit spreads of bonds in

S&P’s six highest categories. The credit spread captures the premium investors demand for holding corporate

debt vs US government debt.

Rating 19-Feb 1-Apr Max Δ From Highs %Δ

AAA 0.57 1.35 2.35 0.78 137%

AA 0.56 1.81 2.76 1.25 223%

A 0.77 2.3 3.31 1.53 199%

BBB 1.31 3.98 4.88 2.67 204%

BB 2.04 6.68 8.37 4.64 227%

B 3.52 9.99 11.89 6.47 184%

From the market high on February 19th to April 1st, credit spreads have widened across the board. AAA debt is

actually yielding slightly less than it was at the highs, as its increase in spread was less than the fall in treasury

yields (+0.78 bps vs -0.94bps). This sort of reaction is consistent with a “flight to quality” by investors. Spreads

across all other categories observed widened more significantly, with the largest changes percentagewise

observed in AA and BB rated bonds. Bonds rated A are now yielding more than BB bonds were at the highs

(anything below BBB is classified as high-yield or junk bonds). This highlights several possibilities, from inefficiency

in the bond market due to lack of liquidity, to expected downgrades in credit ratings.

What has been happening internationally? (continued)

How has the corporate bond market reacted?

Figure 2. Reaction of generic US 10 Year Treasury Yields Source: Bloomberg

Fallen Angel Risk

Of some concern to investors is what is known as “fallen angel” risk, which is the risk that a bond is downgraded

from investment grade (BBB and above) to high-yield or junk (below BBB). According to American investment

bank Jefferies, BBB rated corporate debt now makes up 52%, or 2.67 trillion worth of the total investment grade

universe. When bonds are downgraded to junk status, this action triggers forced selling by some large

institutional players such as pension funds, which are only allowed to hold investment grade bonds. Forced

selling, especially by institutions of this size causes immense downward pressure on bond prices. In addition,

with the quantum of bonds at risk to being downgraded below investment-grade status, it is unclear if the market

for high-yield bonds has sufficient liquidity to absorb them efficiently.

What is our outlook, given the volatility?

At the beginning of the year we advised clients towards shorter duration portfolios due to tight term premiums

and to mitigate against potential downside risk. With the recent shock to credit markets, we believe there may

be long term opportunities presenting themselves to investors in the investment grade space. Investment grade

debt, while yielding significantly more when compared to earlier this year, is expected to be buoyed by the Fed’s

corporate credit facilities which allows the Fed the purchase bonds rated BBB or above, as well as those

downgraded to BB- after March 22nd 2020. However, this strategy should not be applied to companies such as

airlines, hotels, cruises and retailers, as they have a significant amount of uncertainty surrounding them

presently. In addition, as the most severely affected by the COVID-19 measures, these companies risk being

downgraded below BB- and beyond the reach of Fed induced demand.

In the US Treasury market, going forward we expect the US 10-year Treasury yield to climb from its current level

of 0.77% to trade within a range of 1-1.50% in the short-medium term, bringing the yield closer to its historical

trend as investors reallocate funds toward riskier assets while weighing a now higher indebted sovereign. This

reallocation is expected to be induced by an expected pickup in economic activity in the latter part of the year,

spurred by extremely low interest rates and the unprecedented amount of stimulus by both Congress and the

Fed.

US 10yr Treasury Yield

Now that we know the international picture, what is happening locally?

Back to basic relationships

With the TTALL index declining 13.78% in the first quarter of 2020, local investors may be wondering whether

they can find haven in the bond market. Bond prices like stocks, fluctuate with changing market sentiments and

economic environments, however bond prices react differently. When the stock market is increasing investors

normally move away from the bond market into the stock market. On the other hand, when the stock market is

falling, like it is now, investors seek safety in the bond market.

The bond markets, like all other free markets, are affected by supply and demand. Supply and demand for bonds

in turn are affected by numerous factors. These factors can be broken down into three broad categories: 1.

Changes in interest rates; 2. Inflation; 3. Credit quality.

Figure 3. Factors affecting bond market

➢ Interest rates – There is an inverse relationship between interest rates and the price of bonds. In general,

when interest rates rise, bond prices fall. When interest rates fall, bond prices rise.

➢ Inflation - In general, when inflation is on the rise, bond prices fall. When inflation is decreasing, bond

prices rise. That’s because rising inflation erodes the purchasing power of your earnings on a bond.

➢ Credit quality - If the factors that affect the issuer’s credit rating goes up, the price of its bonds will rise.

If the factors that affect the rating goes down, it will drive their bond prices lower. Factors which can

affect a countries credit rating includes: a country’s total debt as a percentage of its GDP, expected

economic growth in that country, external shocks, the level of buffers the country possesses to deal with

economic shocks, etc.

In the rest of this piece, we will take you through the direction of each of these factors and how it is affecting

local Trinidad and Tobago bonds.

How are these relationships driving local yields?

Interest Rates

Year to date (YTD), yields on Trinidad and Tobago (TT) government paper have been very stable, with the largest

change coming from 1-year paper which increased by 12 bps YTD. The 5-year TT Treasury yield and the 10-year

TT Treasury yield stood at 3.61% and 4.53% respectively as at March 2020, when compared with 3.53% and

4.46% in December 2019. This stability in treasury yields is not expected to continue for much longer because of

action taken by the Monetary Policy Council (MPC) of the Central Bank of Trinidad & Tobago (CBTT). On March

17th, 2020 the MPC took a decision to cut the repo rate from 5.0% to 3.5%, a 150 bps cut. This is the 2nd largest

cut (30% in proportional terms) since the 08/09 financial crisis when the rate was cut by 40%. This rate cut by

the MPC will serve to decrease yields on government paper.

Factor

Interest Rates -1 5

5 -1

Inflation -1 5

5 -1

Credit Quality -1 5

5 -1

Movement Bond Prices

What has been happening locally? (continued)

Interest Rates

Figure 4. Trinidad and Tobago Treasury yield curve year to date change. Source: CBTT, JMMB Research

The cut in the repo rate meant that the commercial banks were able to cut their Prime Lending rates (PLR) in April,

meaning that in general customers are now able to borrow at cheaper rates.

Figure 5. Change in Repo & Prime Rates Source: CBTT

The largest cut in PLR came from RFHL (225bps) and the smallest cut came from FCI (105bps). SBTT now has the

lowest PLR in the country.

Prime Lending Rate (%)

Date SBTT RBC RFHL Citibank FCB JMMB FCI Baroda

Jan-2020 9.25 9.25 9.75 9 9.5 9.25 8.85 9.25

Feb-2020 9.25 9.25 9.75 9 9.5 9.25 8.85 9.25

Mar-2020 7.25 7.5 7.5 7.5 7.5 9.25 8.85 7.75

Apr-2020 7.25 7.5 7.5 7.5 7.5 7.75 7.8 7.75

-0.05% -0.03%

0.12% 0.08% 0.07%0.01%

0.06%

1.09%1.42%

2.27%

3.61%

4.53%5.27% 5.58%

-0.10%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

0.25 Year 0.5 Year 1 Year 5 Year 10 Year 15 Year 20 Year

TT Treasury Yield Curve Vs YTD Change

YTD Change Mar-20

5 5 3.5

9.13 9.25 7.5

3579

11

Ap

r-2

01

8

May

-20

18

Jun

-20

18

Jul-

20

18

Au

g-2

01

8

Sep

-20

18

Oct

-20

18

No

v-2

01

8

Dec

-20

18

Jan

-20

19

Feb

-20

19

Mar

-20

19

Ap

r-2

01

9

May

-20

19

Jun

-20

19

Jul-

20

19

Au

g-2

01

9

Sep

-20

19

Oct

-20

19

No

v-2

01

9

Dec

-20

19

Jan

-20

20

Feb

-20

20

Mar

-20

20

Ap

r-2

02

0

Rat

e (%

)

Date

Repo Rate Vs Prime Lending Rate

Central Bank Repo Rate - (%) Median Basic Prime Lending Rate (%)

What has been happening locally? (continued)

Inflation

The inflation rate in Trinidad and Tobago remains at record low levels according to the latest data from the CBTT.

This may be about to change given the action taken by the MPC.

Figure 6. Percentage Month over Month Change in Headline and Core Inflation Source: CBTT, JMMB Research

Correlation analysis of monthly inflation data verses TT monthly treasury rates shows that TT bond yields are

highly correlated to the level of the retail price indices. The data also shows that inflation is more correlated to

the longer tenors on the yield curve. Given the high levels of correlation, we can conclude that increases in

headline & core inflation increases short term bond yields and increases inflation expectations for the future and

so increases yields across longer tenors.

Correlation Table (Index Level)

Tenor 0.25 Year 0.5 Year

1 Year

5 Year

10 Year

15 Year

20 Year

Correlation to Headline Inflation 0.87 0.85 0.78 0.87 0.91 0.93 0.90

Correlation to Core Inflation 0.83 0.81 0.74 0.84 0.89 0.91 0.88

*Calculated using CBTT monthly data for August 2014 to January 2020.

The MPC lowered the primary reserve requirement on commercial bank deposits by 3% to 14%. The MPC

considered that such actions would amplify system liquidity in the short run by approximately TT$ 2.6 billion. The

increase in liquidity available for commercial banks to lend may cause a short-term increase in the inflation rate.

This should put downward pressure on bond prices and upward pressure on TT Treasury yields in the short-term.

Before the action taken by the MPC, excess liquidity in the financial sector grew steadily over the last year, up

21% year on year. With the action taken by the MPC to reduce the reserve requirement, it is expected that

commercial banks excess reserves will increase.

0.4%

0.2%

0.0%

0.3%

0.4%

0.3%

-0.4%

-0.3%

-0.2%

-0.1%

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

Headline & Core Inflation (Monthly % Change)

Core Inflation Headline Inflation

What has been happening locally? (continued)

Inflation

Figure 7. Commercial Banks’ average excess reserves Source: CBTT

Credit Quality

Yields in the local market place are influenced by the benchmark yield- the yield carried by government debt. This

sets the base for rates in the market place. Corporate spreads are the additional yield demanded by investors for

the incremental risk for investing in businesses and is influenced by default risk.

Benchmark Yields

A benchmark bond yield is the yield on government paper for a particular maturity (1yr, 5yr, 10yr etc.). It is often

referred to as the risk free rate as it is guaranteed by the government. One of the key factors which determines

benchmark yields for a government is their creditworthiness. A government’s credit worthiness is determined by

various factors including their level of debt and a credit rating provided by rating agencies. The current benchmark

yield for 1 year, 5 years and 10-year paper are 2.27%, 3.61% and 4.53% respectively.

Fiscal Balance

Figure 8. T&T’s overall fiscal balance Source: CBTT, JMMB Research

2725.1

5465.9

3290.4

0

1000

2000

3000

4000

5000

6000

COMMERCIAL BANKS AVERAGE EXCESS RESERVES (TT$MN)

-15.0

-10.0

-5.0

0.02015 2016 2017 2018 2019 2020p

-2.7

-8.0

-13.5

-5.7

-3.9

-12.3

Overall Fiscal Balance (TT$Bn)

What has been happening locally? (continued)

Credit Quality

In the 2019/2020 budget presentation the Government of Trinidad & Tobago projected a budget deficit of TT

$5.287 billion; the budget was predicated on a gas price of US $3.15 per MMBtu. Due to the decline in energy

prices (Finance Minister indicated that the Gov’t has been receiving US $1.70 per MMBtu Vs. budget of US $3.15

per MMBtu) and the impact of COVID-19, the Minister of Finance indicated that he expects the country to lose

over TT $5 billion in revenue from what was budgeted. The government also announced a TT $2 billion stimulus

package to combat the impact of COVID-19 on the economy. Given these factors it is projected that the overall

fiscal deficit at the end of fiscal year 2020 will be approximately TT $12.3 billion, the second largest deficit in over

20 years.

Debt to GDP ratio

Figure 9. Net Public Sector Debt to GDP Ratio over time Source: CBTT, JMMB Research

To finance the deficit, the government indicated that they would seek funding from different sources including:

• A drawdown from the Heritage and Stabilization Fund (HSF) (Legislation change needed).

• Inter-American Development Bank (IDB).

• International Monetary Fund (IMF).

• Andean Development Bank (CAF).

• Loan financing on the international market (Morgan Stanley, Credit Suisse, Bank of America, and JP

Morgan).

• Local banking system (Local & Foreign currency debt).

The Finance Minister indicated that he expects to raise approximately TT $7 billion in debt to finance the deficit,

and the balance we speculate will come from the drawdown on the HSF. For 2020, we expect Trinidad & Tobago’s

debt to increase by approximately TT $12 billion ($5.287B + $7B).

Due to the deterioration of energy prices and the impact of COVID-19, the IMF in their April 2020 WEO revised

their GDP growth projection for Trinidad & Tobago to -4.5% (IMF October 2019 WEO projected GDP growth of

1.5%).

Given the expected increase in debt and the expected decline in GDP in 2020, we are forecasting that Trinidad and

Tobago’s Debt to GDP ratio will increase by almost 12 percentage points to 77.1% at the end of 2020.

50.6%

58.0%60.3% 60.8%

65.5%

77.1%

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

2015 2016 2017 2018 2019 2020

Net Public Sector Debt to GDP Ratio (%)

What has been happening locally? (continued)

Credit Quality

S&P Global Downgrade

On March 26th, 2020 Standard & Poors rating agency announced that they have downgraded T&T’s long-term

foreign and local currency sovereign credit ratings to ‘BBB-’ from ‘BBB’, and the short-term foreign and local

currency sovereign credit ratings to ‘A-3’ from ‘A-2’. The rating agency also revised down its transfer &

convertibility assessment to ‘BBB’ from ‘BBB+’.

S&P’s rationale for the downgrade is that it expects “lower oil and gas prices over the next several years will

weaken T&T’s government revenues and lead to larger increases in net general government debt”. S&P said T&T’s

debt outlook is stable as “this balances the risk that lower hydrocarbon prices may lead to greater deterioration

in the country’s growth, external finances, or interest burden, with our expectation that the government’s

financial assets will provide a safeguard for economic volatility.” The ratings agency now projects “an average WTI

oil price of US $25 per barrel in 2020, US $45 per barrel in 2021, and US $50 per barrel by 2022 and beyond; an

average Henry Hub gas price of US $2 per MMBtu in 2020, US $2.25 per MMBtu in 2021, and US $2.5 per MMBtu

in 2022 and beyond.”

Corporate Spreads

A corporate (or credit) spread is the extra interest a lender requires to compensate them for risk. The spread is

measured in basis points over the relevant benchmark bond yield. The higher the perceived risk, the wider the

spread. Companies in certain sectors may have wider spreads than others as their industries are perceived as

riskier. Companies with more debt on their books may also have a wider spread than others.

The local corporate fixed income market is opaque with most corporate issues trading ‘over the counter’ and only

the NIF issue trades disclosed on the Trinidad & Tobago Stock Exchange (corporate bond market). This means local

investors- retail and institutional alike depend much on internal pricing models and regional credit rating agencies

like CariCRIS to appropriately value its securities. Rating shifts usually occur with a lag and so at this time pricing

among firms may differ widely. This is exacerbated by the lack of 1) an unbiased aggregator of bond pricing data

and 2) incentive for firms to share indicative pricing.

Rating changes thus far

S&P also downgraded two of Trinidad & Tobago’s largest banks, Republic Bank Ltd and First Citizens Bank Ltd. S&P

revised its trend on T&T’s Banking Industry Country Risk Assessment (BICRA) economic risk to negative from stable

because it expects a pressure surge on the banks’ asset quality and that business growth would slow as the

coronavirus outbreak hits trade and lower oil prices contribute to a deeper economic contraction and increasing

unemployment. The rating agency stated that although T&T’s banks are not heavily exposed to oil companies, the

local economy is heavily dependent on the energy sector. As a result, it expects lower hydrocarbon prices will

cause T&T’s economy to shrink 2.7% for 2020, continuing the contraction in the country’s real GDP per capita over

the past several years.

What has been happening locally? (continued)

Credit Quality

On March 20th, 2020 CariCRIS rating agency place all its ratings on Rating Watch – Developing. CariCRIS indicated

that the rating action was based on the widespread impact that COVID-19 is having on global and regional

economies and financial markets, which, if continued for a prolonged period, can adversely affect revenue, cash

flows and the overall creditworthiness of all their rated entities.

On April 2nd, 2020, CariCris reaffirmed MASSY’s credit rating of CariAA+ (high creditworthiness). CariCris stated

that “Massy’s ratings reflect its moderate industry diversification and good market position which reduces the

impact of severe economic downturns on the Group’s performance. Also supporting the ratings is the Group’s

portfolio of complementary businesses that promotes cross selling and value chain maximization. Furthermore,

the Group’s strong cash flows and healthy debt protection metrics continue to drive its solid financial

performance.”

Trinidad & Tobago USD Bonds

Due to various factors such as, the energy price war between Russia and the Saudi Arabia; the impact of COVID-

19 on the economy; and a downgrade of Trinidad & Tobago’s credit rating; T&T US$ denominated bond prices

have decline sharply.

Price Graph

Figure 10. YTD Price movement for TSTT, TPHL, TRINGEN, NCG, and T&T Eurobonds traded internationally

Source: Bloomberg

What has been happening locally? (continued)

Credit Quality

As can be seen by the graph above, on and around March 9th, 2020, all sovereign and quasi-sovereign Trinidad and

Tobago bonds declined sharply. The trigger for the decline was a collapse in the oil price, following a meeting of

OPEC+ ministers on March 6th. Russia (not an OPEC member) was unwilling to cut production to stabilize the price

of crude. The response from Saudi Arabia, OPEC’s largest producer, was unexpected. It offered discounts to its

customers and announced an increase in its output from the next month. In effect, it launched a price war. Early

on March 9th the price of a barrel of the Brent benchmark blend slumped by around a third, almost touching $31,

before recovering a few dollars. YTD the TRINGEN 2027 bond experience the largest price decline (24%), and as

expected the TRITOB 2024 and TRITOB 2026 experienced the smallest declines, 12% and 14% respectively.

Brent Crude Oil Price

Figure 11. YTD Price movement of Brent Crude Source: Bloomberg

As can be seen by the graph above, since March 9th, 2020, Brent Crude prices have been significantly depressed

reaching a low of US $22.74 on March 31st, 2020. However, on Sunday 12th April, 2020, Saudi Arabia and Russia

ended their oil price war by finalizing a deal to make the biggest oil production cuts in history, following pressure

from US President Donald Trump to support an energy sector ravaged by the coronavirus pandemic. OPEC+ said it

would cut 9.7 million barrels a day in oil production in May and June, equivalent to almost 10% of global supply,

and will continue with lower reductions until April 2022, in an effort to stabilize global crude markets. This

announcement, however, hasn’t as yet spurred the oil market as the price as at 14th April, 2020 stood at US $30.02

per barrel.

What has been happening locally? (continued)

Credit Quality

Yield Graph

Figure 12. YTD Yield movement for TSTT, TPHL, TRINGEN, NCG, and T&T Eurobonds traded internationally

Source: Bloomberg

Due to the decline in the prices, many of these bonds now present very attractive yields. TRITOB 2024 which

matures on January 16th, 2024, now provides investors with a yield of 6.304% (4/14/2020). TPHL 2026, which

matures on June 15th, 2026, now provides investors a yield of 11.345% (4/14/2020).

After analyzing the historical correlation between T&T USD bonds and a custom index of global energy company

bonds, we believe that there will likely be a correction in the prices of the T&T USD Eurobonds to the upside in the

short to medium-term as markets settle to move to its historical average relative spread. At first glance, this

overshoot of prices, in our opinion, to the downside will likely lead to opportunities for all local TT Eurobond issuers

quoted with particular attention to the TSTT issue which is likely to show relatively more resilient cash flows than

its energy-based counterparts tempered by the reduced credit worthiness of the sovereign. This analysis is purely

technical in nature so that investors requiring a fundamental dive and official recommendation into each credit

should stay abreast of our latest corporate fixed income research available on our websites as follows:

Regional Research: https://jm.jmmb.com/research-articles

Trinidad & Tobago Research: https://tt.jmmb.com/company-insights

What is our local outlook?

At the beginning of 2020, in our fixed income review and outlook, we observed that investors were piling into safer

securities to preserve their funds in light of the upcoming general elections and thus pushing short tenor bond

prices up [and yields down], while longer tenor bonds were relatively stable causing a steepening of the treasury

curve. The shift in central bank monetary policy and investor sentiment will likely exacerbate the steepening of

the curve as short term rates decline further and investors require a premium on long term bonds due to the

uncertainty in energy markets and increase government debt levels to fund the emergency COVID-19 response.

The availability of foreign exchange is likely to tighten sharply in the short term as hard currency as well as credit

lines are shifted to purchase essential goods and manufacturing inputs and financial outflows increase as investors

speculate on devaluation given slowed energy sector revenues.

As with our outlook for the international fixed income market (above) and our earlier local sector outlook, we see

greater stress on cash flows likely in consumer discretionary and energy sectors in the short term likely leading to

increased default/refinancing risk amongst higher leveraged (both debt and operating leverage) credits, and those

with limited cash on hand or access to credit facilities to fund core expenses over the next few weeks to months.

Despite these short-term pressures, senior debt obligations, local currency government bonds, banking sector

debt, local mortgage backed securities continue to be the preferred space for fixed income investing at the

moment.

For investors with a higher tolerance for risk and a long-term time horizon, there may be opportunities in the local

fixed income market. We view the demand side shock in both energy and consumer discretionary sectors as short

term and will likely slowly return to normal levels in the latter half of 2020 into 2021 as persons return to normal

life in a post COVID-19 world. Barring any further supply side shock to energy, upward energy prices spurred on

by recovering global demand will help stabilize yields on T&T Eurobonds, further add to investor confidence, ease

banking sector concerns and ultimately present upside for the riskier credits. While we do not believe it is prudent

to shift entire portfolios down the credit curve, investors should consider adding incremental risk to issuers with

sufficient liquidity to weather the downturn.

Given local fixed income market opaqueness for TTD bonds, investors are encouraged to seek quotes from multiple

brokers, as well as seek historical quotes for bonds to ensure they are adequately compensated given the

movement in credit spreads. At JMMB Investments, we work with our clients to ensure best pricing and execution

for the size of allotment as well as maintain full transparency in our indicative pricing on a weekly basis.