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(Bloomberg opinion) – If I were to sum up last week on the global $ 100,000 billion bond market, it would be pretty simple: traders are extremely afraid of what the coronavirus epidemic will mean for the global economy and adjust their positions accordingly.
Yet it sounds like a vast understatement. From US Treasuries to leveraged loans and municipal debt to Austrian bonds of the century, the latest trading sessions ended in a snowstorm proclaiming records and the wildest market swings in years. One can guess if such extremes can persist. Indeed, so much is uncertain about the coronavirus, its potential spread, and what the monetary and fiscal authorities will need to do to mitigate the economic spinoffs.
The bond markets, even more than stocks, are pessimistic about the outlook. Here are 13 charts that show some of the disaster and global chaos through the Wall Street trading offices over the past few days.
The journey through the bond markets must start with treasury bills at 30:
The “long jump”, as we know, captivated traders throughout the week, but reached a crescendo on Friday. As U.S.-based investors slept, yield plunged 28 basis points into one of the sharpest declines since the financial crisis. Even a blowout report did nothing to stop the incessant purchases – yields reached as low as 1.1846%, down almost 40 basis points in 24 hours and a half. ‘It was in early 2020. The rally would have been intense if the circuit breakers of CME Group Inc. had tripped four times on 30-year bond futures contracts.
The insatiable demand for treasury bills was hardly limited to longer-lived assets. Five-year treasury bills returned about 1.4% on February 19, when the S&P 500 set a record. At the end of the week, the yield fell below 0.5%:
How extreme was this rally? According to the relative strength index analysis, the five-year note was “overbought” for 10 consecutive trading days, the longest period for maturity since 2000. It has reached the most extreme overbought level since 1998 March 3 after the Federal Reserve’s emergency interest. – cut of 50 basis points.
These dynamics of short and long term debt have combined to create a mad rush for any trader who bets on the shape of the yield curve:
The Fed’s rate cut initially caused the curve to steepen, with the spread between five- and 30-year Treasury bills widening since October 2017. But then the mad rush for duration started installed towards the end of the week, flattening the yield curve by 19%. points, the most for a single day since September 2011.
The stock market fear gauge, known as the VIX, is getting a lot of attention. But he has a lesser-known cousin in the bond market: the Chicago Board Option Exchange’s 10-year US Treasury bill volatility index, known by the symbol TYVIX. Like its better-known counterpart, TYVIX jumped last week to the highest level since 2011, in the wake of S&P Global Ratings which took the unprecedented step of America’s credit rating downgrade:
The massive upturn in US treasury bills has had knock-on effects on all bond markets. A market particularly sensitive to the level of benchmark yields is the municipal market of $ 3.8 trillion. Investors in state and local government debt like to measure the relationship between tax-exempt ammunition yields and taxable treasury rates as an indicator of relative value. Since Donald Trump was sworn in as president, this ratio has remained below 100 for two-year, five-year and 10-year terms. This broke last week because the munis could not follow the flow of money entering the Treasury bills:
Top rated 10 year munitions now earn 0.9% tax free, which equals 1.44% on a taxable basis for those in the highest federal bracket – or double the rate in effect on a 10-year Treasury bill. This was apparently not a strong enough argument, as investors removed money from Muni’s mutual funds for the first time in over a year.
It could be worse for equipped fund managers – they could oversee funds that buy bonds and loans from American companies. Overall, investors have drawn the most cash from U.S. credit funds in a decade during the week until March 4, according to data from Refinitiv Lipper. Investment funds lost $ 4.8 billion, those who bought junk bonds saw $ 5.1 billion withdrawals, and leveraged loan portfolios saw an outflow of $ 2.3 billion of dollars.
At first glance, this might seem like a hasty decision. After all, the Bloomberg Barclays indices that track high-yield, high-quality corporate bonds posted positive returns last week. But that more reflected the overall decline in yields on treasury bills. The Markit CDX North American Investment Grade Index tells a different story. The index, which measures the perceived overall risk of corporate credit, surged on Friday the most since at least 2011, a sign that investors are starting to worry about potential defaults after years of calm:
These fears are evident when looking at the spread between double B and triple B corporate bond yields. I wrote on this gauge, used by Jeffrey Gundlach, chief investment officer of DoubleLine Capital, in a column February 26. The difference exploded to 181 basis points two days later, marking the largest gap since mid-2016:
For most of 2019, traders did not seem to notice any difference between the two rating levels, even though the double B is considered undesirable and the triple B is investment grade. Now that the prospect of a global slowdown is a priority, they are starting to get tough again and prioritizing more creditworthy corporate debt.
Leverage loans look just as bad, if not worse. The price of leveraged loans, as measured by the S & P / LSTA leveraged loans index, fell to 94 cents this weekend from 96.75 cents as recently as February 23. This is the lowest since the end of the December 2018 sale of risky assets:
Floating rate debt had steadily increased in 2020, in the hope that the Fed would keep interest rates stable this year. Obviously, this is no longer the case. These losses are also starting to show up in the price of double B tranches of secured loan bonds. A Palmer Square Capital Management Index shows that prices are at a three-month low.
Credit markets are just as risky in Europe. The Markit iTraxx Europe index soared to 80 basis points on Friday, capping a sharp increase from a record high of 41 basis points on February 17. It was higher in early 2019 before coming back down to Earth. But like other measures, it reflects how easily widespread appeasement for credit risk was shattered in just a few weeks.
Bond traders in Europe are also looking to another preferred form of recession protection, John Ainger and Stephen Spratt of Bloomberg News said on Friday. They buy short-term German bonds against interest rate swaps, because the former benefit from the demand of paradises while the latter carry credit risk. The gap between them has widened in more than a year. This kind of extreme movement occurred in 2017 when it seemed that the far right Marine Le Pen had a chance to win the French elections in 2017 and during the Italian budget conflict in 2018.
No matter where you go around the world, even outside the direct gravitational pull of the European Central Bank, it becomes more difficult to find sovereign debt with yields above 1%:
In Canada, after its central bank followed the Fed by cutting interest rates by 50 basis points, the 10-year rate fell to 0.7%. In Australia, its 10-year debt raised more than 1% on February 20; it is now 0.68%. It took until Friday in New Zealand, but its 10-year sovereign yield fell to 0.96%. UK gilts have not returned more than 1% since May, but have fallen to an all-time low of 0.24%.
Finally, there is the Austrian bond of the century, a favorite in some quarters for measuring market sentiment. Debt, which matures in 2117, brings a record low of 0.475%:
My colleague from Bloomberg Opinion Marcus Ashworth asked “what is madness?” when the bond yielded 1.2%. Now it offers less than half. Bond traders found themselves asking the same thing after last week.
To contact the author of this story: Brian Chappatta at [email protected]
To contact the editor responsible for this story: Beth Williams at [email protected]
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Brian Chappatta is a Bloomberg Opinion columnist covering the debt markets. He previously covered bonds for Bloomberg News. He is also the holder of the CFA charter.
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