COMMENTARYHARVEST US INVESTMENT GRADE BOND PLUS ETF

APRIL 2020 BY AMUNDI PIONEERINVESTMENT GRADE CORPORATE CREDIT

Stabilization

Global risk markets were in recovery mode during

most of April. Investor sentiment and, in turn, asset

prices responded to positive developments along three

key fronts: virus containment (COVID-19 case curve

flattening), medical science (therapeutic and vaccine

advances), and public policy (fiscal and monetary).

Specific to the latter, the U.S. government enacted

$2.5 trillion in support programs targeted at those

individuals and small businesses most impacted by

virus activity restrictions. And the Federal Reserve

continued to deliver on its “whatever it takes” mantra

as the central bank focuses on credit market function

and supporting domestic economic stability (and

ultimately growth). As virus containment measures are

proving to be effective, global focus is slowly transi-

tioning to the importance of economic rehabilitation

and recovery. Local authorities around the world have

started the process of bringing economies out of

self-induced comas. Bear in mind that “success” during

this next phase will not be measured by high economic

output, but rather by low virus infection rates as the

latter is a prerequisite for continued economic reopen-

ing. Though the path to health and economic recovery

remains unknown, the data accumulated over the next

month should give us better insights into the depth and

duration of the downturn.

To summarize April’s broad market activity: U.S. Trea-

sury yields modestly declined (10-year -2 basis

points), U.S. equities soared (S&P 500 +12.8%, RTY

+13.7%), USD corporate credit spreads narrowed (IG

-70 basis points, HY -136 basis points), commodities

continued to slide (CRB Index -3.8% and oil -8.0%),

implied equity volatility eased (VIX from 53.5 to 34.2),

and the U.S. Dollar was steady.

A month removed from experiencing one of the worst

performance drawdowns in history, the Bloomberg

Barclays U.S. Corporate Index rebounded sharply

during April and posted the highest monthly total

return since 2008 (+5.24%). Relative to dura-

tion-matched U.S. Treasury returns, the Index outper-

formed by 4.55% or a ~45% retracement of March’s

duration-matched underperformance. The Index aver-

age spread closed April at 202 basis points or 70 basis

points narrower for the month. Investor sentiment and,

in turn, investment grade corporate bond spreads

were buoyed by positive developments along the virus

containment, medical, and public policy fronts. The

Federal Reserve unexpectedly expanded the scope of

their recently announced corporate security purchase

programs in early April to include issuers recently

downgraded to below investment grade status, or so

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SUB-ADVISOR

COMMENTARYHARVEST US INVESTMENT GRADE BOND PLUS ETF

called “fallen angels”, as well as High Yield ETFs. The

policy refinement was targeted to ease investor

concerns as markets brace for a wave of credit rating

downgrades and fallen angel activity over the next 12+

months. After a month of preparation, we expect the

Federal Reserve to officially launch both the Primary

and Secondary Market Corporate Credit Facilities

(PMCCF and SMCCF) during May. Market expecta-

tions for the SMCCF’s purchase activity are high and

we believe it will be important for the Fed to deliver on

those expectations. Broad market spread levels are

representative of those measured during typical

recessionary periods and currently reside at the 88th

percentile when compared to spread levels since the

mid-1990s. While “typical” is not the first word that

comes to mind to describe the current macro and

market environment, we believe that the monetary and

fiscal efforts announced to date have gone a long way

to truncate many extreme left-tail outcomes for invest-

ment grade corporate market spreads.

At the sector, credit quality, and maturity levels: Indus-

trials outperformed Financials and lower credit quality

(BBB) outperformed higher credit quality (A-AA). As

market spread levels normalized, so did issuer credit

curves as shorter/intermediate maturity issuer

spreads narrowed more than longer-maturity issuer

spreads. We anticipate that the Fed’s presence in the

corporate bond market will help keep issuer credit

curves “normal” in the future. At the sector level, April

was a mirror image of March with all sectors posting

positive excess returns, led by the energy and insurance

sectors. Energy spreads recovered from the dramatic

spread widening that we witnessed during the month

of March, as investors looked beyond the extreme

price movements in the front month futures contract

that at one point traded at negative prices (first time

ever!). OPEC+ agreed to cut production by approxi-

mately 10 million barrels per day on April 12th, effec-

tively ending the price war between Saudi Arabia and

Russia. This is not enough to offset the COVID-19

related global demand destruction, but did provide

some market relief as the overhang of greater supply

wanes. It is possible that we have seen the low point

in oil demand as global economies slowly begin to

reopen and economic activity resumes. Insurance

company asset portfolios recovered a large portion of

their losses during the month, and some areas have

seen far fewer claims than normal (e.g. autos) due to

the lower level of economic activity. Offsetting this

positive, the risk that insurers will see a spike in

workers compensation payouts as state insurance

regulators are taking steps that make it easier for

policyholders to collect on their policies. While still

posting a positive excess return, the REIT sector was

the worst performing sector of the month. A cloud of

uncertainty continues to hang over the sector and the

ability of tenants (especially restaurants and retail) to

cover rent payments in the near-term. Longer-term,

investors are beginning to price in the likelihood of

structural changes in how companies utilize office

space in the future, social distancing measures, and

the “success” of remote operations does not bode

well for office space demand. The primary market

continued to operate at record-setting output as

issuers eager to build balance sheet positons were

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SUB-ADVISOR

Certain statements in this document are forward looking. Forward-looking statements (“FLS”) are statements that are predictive in nature and depend upon or refer to future events or conditions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. Unless required by applicable law, Harvest Portfolios Group Inc. does not undertake, and specifically disclaim, any intention or obligation to update or revise any FLS, whether as a result of new information, future events or otherwise.

Commissions, management fees and expenses all may be associated with investing in Harvest Exchange Traded Funds (managed by Harvest Portfolios Group Inc.). Please read the relevant prospectus before investing. Harvest ETFs are not guaranteed, their values change frequently and past performance may not be repeated. Tax, investment and all other decisions should be made with guidance from a qualified professional.

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COMMENTARYHARVEST US INVESTMENT GRADE BOND PLUS ETF SUB-ADVISOR

met with significant global investor interest to provide

term financing. All told, April’s investment grade

issuance totaled nearly $300 billion and easily

eclipsed March’s record tally. Though credit spreads

are wide and new issue concessions are elevated, all

in borrowing costs remain very low relative to history.

May is expected to be another active month as

companies look to access capital prior to the typical

summer lull. Current forecasts range from $250 to

$300 billion for the month. We anticipate that elevat-

ed issuance will provide a headwind to overall spread

performance as investors “digest” the new supply.

Though U.S. economic activity may have bottomed,

the eventual recovery is likely to be slow as long as

COVID-19 is a health risk and social distancing mea-

sures are needed. The Federal Reserve’s policy

stance will remain accommodative with its target on

the Federal Funds rate holding steady at 0.00% to

0.25% until at least the end of 2021. Given this,

yields on short-term U.S. Treasury notes are likely to

remain low as well as costs to hedge USD fixed

income exposure back into most developed market

currencies. Though significant government deficit

spending and a corresponding uptick in Treasury

borrowing should pressure intermediate and

long-maturity Treasuries yields higher, we expect the

yield move will be modest given a relatively slow

economic recovery. Corporate bond spreads are

attractive across a number of market sectors, but

selectivity is increasingly important following the

recent spread tightening from recent extreme levels.

We appreciate the elevated levels of uncertainty

(social, economic, and market), but history tells us

that spread valuations offer compelling prospective

excess returns over the next one to two years.