While the big picture of the stock exchanges in recent weeks has been drawing all the attention, the bond market has not been quieter. Experts even admit that such violent upward and downward movements are “unheard of”. “We were surprised to see the lack of liquidity, including in US sovereign bonds, which represent the most liquid market in the world,” says Catherine Reichlin, head of financial research at Mirabaud in Geneva.
The most liquid, but also the ultimate haven of peace, in the event of a crisis. However, bonds were faced with significant turbulence: first, there was the rush. In the face of panic, investors rushed to these assets considered to be the safest and yields, particularly in the United States, reached historic lows. Then, a little before the end of February, the same reverse movement took place, with as much violence.
Everyone sells everything
Normally bonds and stocks go in different directions, but as the coronavirus spreads further and fears about damage to the economy mount, all assets have started to fall at the same time. “In major crises, everyone sells indiscriminately. This was already the case in 2008, “recalls Catherine Reichlin.
The Covid-19 and the economy
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The reasons? Many investors had to find funds to deal with margin calls, and to do so, turn to a market where it is easy to sell and where losses are limited. “So they got rid of government bonds en masse,” said the expert. At the same time, while governments promised thousands of billions of dollars, euros or francs to support economies paralyzed by the pandemic, investors began to worry about the soundness of public finances and therefore preferred to hold cash, rather than bonds. The same movements have occurred in Europe, notably with German sovereign bonds, which are also the usual refuge in the event of panic.
The Fed, the ultimate buyer
In this context, the “market makers”, the banks which put the seller and the buyer in touch, no longer played their role. “As in 2008, they found themselves without capital to hold the market,” adds Catherine Reichlin. As a result, the spreads between selling and buying prices have widened to record levels.
Before the Federal Reserve (Fed) intervened and presented itself as a buyer in a market that no longer had any. “It was particularly aggressive in restoring the facilities that had been used after the 2008 crisis,” note experts from Goldman Sachs Asset Management in a note. As a result, pressures have started to ease in the US sovereign bond market, although liquidity remains an important issue in other parts of the market, they continue, citing corporate and municipal debt. For the latter, the budgetary responses will be the most important, they judge. How governments support businesses – through loans that may or may not need to be repaid – will be essential.
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As to whether the bonds of certain states, deemed safe, will remain safe havens, we will know much later. Catherine Reichlin believes that this will be the case, “even if we cannot exclude market distortions as we have seen recently, this market remains the largest and most liquid in the world. The Fed’s quick response to bring back liquidity was a relief and a positive signal of support. ”
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