The Wall Street Journal - 14.03.2020 - 15.03.2020

THE WALL STREET JOURNAL. **** Saturday/Sunday, March 14 - 15, 2020 |B13

The measures are being put

into place as the U.S. and

world economies look increas-

ingly likely to slip into reces-

sion with expanding swaths of

commerce being shut down

amid the pandemic. The coro-

navirus crisis has sent shock

waves through stock, bonds

and commodities, prompting

sharp swings in U.S. Treasury

yields, which rise when bond

prices fall.

Further alarming some in-

vestors is that the traditional

relationships between stocks,

bonds and gold broke down at

times this week as investors

rushed to sell broadly across

asset classes, leading to huge

concurrent price drops. Typi-

cally as stocks fall, assets like

Treasurys and gold appreciate.

Yields have risen despite

declines in stocks. On Friday,

the yield on the benchmark 10-

year bond edged up to 0.946%,

bouncing from a record low

earlier in the week and logging

the biggest one-week yield

gain since September.

The concurrent swoon

across asset classes was a sign

of how extreme the anxiety on

Wall Street had gotten. Money

managers appeared to be

dumping assets across the

board to raise cash. Gold

prices logged their biggest

one-week decline since Sep-

tember 2011.

Yields pared some gains af-

ter the University of Michi-

gan’s survey showed the virus

and the stock selloff are chip-

ping away at Americans’ eco-

nomic outlook, one of the

many economic data points in-

vestors will be parsing to

gauge how the virus is affect-

ing businesses and consumers

in the U.S.

On two occasions in the

past week, stocks fell so hard

and so fast that for the first

time in 23 years, circuit-break-

ers were triggered that froze

the entire market for 15-min-

ute spans. Investors searched

for protection in the options

market, sending prices higher

and driving the Cboe Volatility

Index, known as Wall Street’s

“fear gauge,” to its highest

level since the financial crisis

this week.

To some, the jolts of volatil-

ity recently were reminiscent

of dark moments during the fi-

nancial crisis.“When you go

weeks and weeks of constant

selling pressure, it’s pretty

brutal on the psychology,” said

Mike Bailey, director of re-

Funding strains in the
banking system worsened
slightly Friday despite the
New York Federal Reserve’s of-
fer to inject $1.5 trillion of ex-
tra short-term funding.
The strains suggest the
Fed’s promised injection of
central-bank money, an-
nounced Thursday, hasn’t fully
solved the banking system’s is-
sues. Some ana-
lysts and investors
think a return to a
full quantitative
easing—or bond-buying—pro-
gram will be needed to calm
funding markets that lie at the
center of the world’s financial
infrastructure.
Yields on 10-year U.S. Trea-
surys rose to settle at 0.946%
Friday from 0.852% Thursday,
according to Tradeweb, while
30-year Treasury yields rose
to 1.541% from 1.411%. Stocks
also rebounded. However,
bond and equity markets re-
mained volatile and price
moves may not reflect normal
changes in investors’ appetite
for risk, according to analysts.
In a sign of growing fund-
ing strains in the banking sys-
tem, indicators of the differ-
ence between the rate at
which banks lend to each
other and the Fed’s interest
rate increased to the highest
level since the tail end of the
2008-09 financial crisis. The
spread between dollar three-
month forward rate agree-
ments and overnight interest
swaps jumped to 0.758 per-
centage points Friday, from
0.598 percentage points
Thursday.
The Fed offered up to $1.5
trillion for periods of one
month and three months

Thursday and Friday. However,
banks only drew a total of
$119.5 billion, suggesting this
wasn’t the kind of liquidity
they needed.
The low takeup may indi-
cate that only a few banks are
really in need of cash, accord-
ing to bankers and analysts. It
also suggests that the prob-
lems might not be so simple
as a shortage of central-bank
reserves.
“There is lots of money in
the system but it is not circu-
lating easily,” said Lefteris
Farmakis, an foreign-exchange
strategist at UBS. “The ability
of the financial system to in-
termediate in this market is
now very constrained.”
The underlying problem,
say some investors, is that
banks are holding too many
Treasurys and don’t want any
more. It is a situation that
hasn’t been fully resolved
since it was exposed by a
spike in borrowing costs in re-
purchase—or repo—overnight
borrowing markets in Septem-
ber.
“The massive quantity of
reserves they are going to
pump into the market over the
next two days should help al-
leviate the reserve shortage:
This is [its] bazooka,” said
Guy LeBas, chief fixed income
strategist at Janney Capital
Management. “But it doesn’t
remove the excess supply of
Treasurys on bank balance
sheets, which is the fundamen-
tal problem. For that you need
a real QE program.”
Conditions aren’t as bad in
overnight funding markets as
they were in September, when
the Fed had to increase the
size of its balance sheet again.
A wave of Treasury issuance
coincided with the end of the
Fed’s bond-buying program,
plus the shrinking of its bal-
ance sheet had increased the
supply of Treasurys in the sys-
tem, clogging up bank balance
sheets. This made banks less
willing to lend to other banks,
brokers and hedge funds.
Some of what the Fed is do-
ing could be seen as easing
the way to a restart of bond
buying in earnest, but that is
creating ambiguity for mar-
kets, according to Seth Car-
penter, an economist at UBS.

BYPAULJ.DAVIES
ANDJOEWALLACE

Fed Move

Fails to

Calm Bank

System

The underlying

problem, say some,

is that banks own

too many Treasurys.

CREDIT
MARKETS

MARKETS

the most liquid bond markets

in the world, and investors

typically deem the securities

to be nearly as safe as govern-

ment bonds. The Federal Re-

serve holds large portfolios of

both on its balance sheet.

But stark differences be-

tween the two markets have

shown up in recent days,

pushing down prices on mort-

gages securities even as Trea-

sury prices generally rise amid

strong demand. Prices typi-

cally rise as yields fall.

The differential between

the yield on a mortgage-

backed securities index

tracked by Tradeweb and the

10-year Treasury yield jumped

to about 1.5 percentage points

from less than 0.5 point a

week earlier, hitting its largest

point in years. That differen-

tial roughly measures the ad-

ditional amount that investors

demand over Treasurys to

hold mortgage bonds.

The sharp moves show how

investors that long viewed a

vast array of assets as con-

taining relatively little risk are

suddenly distinguishing be-

tween them and trading ac-

cordingly. While investors

have largely been able to

transact in the market, many

are souring on certain invest-

ments in case conditions dete-

riorate further.

“You just want to be pre-

pared if it goes from bad to

ugly to catastrophic,” said

John Kerschner, head of U.S.

securitized products at Janus

Henderson Investors. Still, Mr.

Kerschner said his firm bought

mortgage bonds on Thursday

expecting the Fed could step

in to support the market.

One defining aspect of

mortgage investments is the

way mortgages get paid off.

When falling rates spur home-

owners to refinance into new,

lower-rate mortgages, the in-

vestors in the old mortgages

and mortgage-backed securi-

ties lose out on higher pay-

ment streams.

Mortgage rates are near

their lowest level ever, as con-

cerns about coronavirus push

down interest rates around the

world. That helped spur refi-

nancing applications to their

highest level since 2009 this

week, according to an index

kept by the Mortgage Bankers

Association.

The fast pace at which

mortgage bonds are expected

to pay down has investors on

edge, said Walt Schmidt, se-

nior vice president of mort-

gage strategies at FHN Finan-

cial. “It’s been a really ugly

kind of trade for the last cou-

ple of sessions,” Mr. Schmidt

said.

Investors have been dump-

ing mortgage bonds at a rapid

clip, as interest rates plunge

on concerns about the corona-

virus pandemic and spur a

flurry of refinancings that is

creating bottlenecks through

the mortgage system.

Mortgage-backed securities,

which package together pools

of home loans, trade in one of

BYBENEISEN

Investors Sour on Mortgage Debt

Falling rates have

spurred homeowners

to refinance into new

lower-rate loans

Economic fallout from the

novel coronavirus and collaps-

ing oil prices are sparking

steep declines in the $3.4 tril-

lion market of corporate

bonds with triple-B credit rat-

ings, the lowest rung on the

investment-grade scale.

Fear that many of the

bonds will be downgraded to

junk status is causing an un-

usually steep drop in prices

this month, despite the sharp

rally in Treasury bonds, which

typically buoys investment-

grade corporate debt.

Yields on an index of triple-

B corporate bonds in the U.S.

jumped a half-percentage

point to 3.24% from Monday

to Wednesday, the biggest

two-day jump since at least

the financial crisis, according

to data from Bloomberg Bar-

clays Indices. Bond yields rise

when prices fall.

Some banks have already

cut their internal ratings of

such companies to junk in ad-

vance of the ratings firms, ac-

cording to research by analyt-

ics firm Credit Benchmark.

Companies in industries

that are most susceptible to

falling oil prices and the

spread of the virus, like en-

ergy, transportation and lei-

sure, took the brunt of the

pain this week.Occidental Pe-

troleumCorp.’s triple-B bond

fell to about 80 cents on the

dollar from 117, andBoeing

Co. bonds dropped to about 85

cents from 120, according to

data from MarketAxess.

The crunch at the bottom of

the market is being magnified

because there are far more com-

panies rated triple-B today than

during previous downturns.

BYMATTWIRZ

Virus Hits

Triple-B

Bonds

search at FBB Capital Partners.

The Dow fell 10% on Thurs-

day after President Trump an-

nounced a 30-day ban on some

travel from Europe into the

U.S. It was the largest one-day

drop since the 1987 stock-mar-

ket crash, what became known

as Black Monday. Abroad, the

pan-continental Stoxx Europe

600 plummeted 11.5% on

Thursday, its largest decline on

record, dragging the index to a

level not seen since 2013. On

Monday, oil prices tanked the

most since the Gulf War of

1991 as a price fight between

Saudi Arabia and Russia esca-

lated.

Some traders said it was

hard to transact at times and

that liquidity, or how easy it is

to get in and out of positions,

worsened in some markets,

such as Treasurys.

“We need to be able to

transact constantly to manage

our risk,” said Zhiwei Ren, a

portfolio manager at Penn Mu-

tual Asset Management, who

said he felt handcuffed at

times by how costly it was to

trade across asset classes,

credit in particular. “Some-

times you want to do some-

thing, but you can’t do it.”

Mr. Ren said he has grown

pessimistic about the world

economy and has been selling

exposure to stocks this week

as the rout continued. He

thinks the worst isn’t over for

the stock market. He started

unloading stocks in late Febru-

ary as major U.S. indexes were

close to highs.

Then the S&P 500 swiveled

into a bear market in just 16

trading sessions, a record pace.

The speed at which markets

went from calm to frenzied has

alarmed traders across Wall

Street. Just weeks ago, corpo-

rate earnings and a domestic

economy that was humming

along led stocks to fresh highs.

“Are we going to a global

recession? It’s becoming more

likely,” said Kevin Ferret, a

rates and derivatives strategist

at Société Générale.

Dow Jones Industrial Average

Cumulative percentage change since Wednesday’s close

Source: FactSet

0

–10

–8

–6

–4

–2

%

Largest

percentage drop

since 1987

Largest

percentage gain

since 2008

Thursday Friday

are staying home, which will

cut back on spending and po-

tentially crimp key sources of

economic growth over the past

decade. Much remains un-

known about the virus and its

potential reach, adding to in-

vestors’ unrest.

Those rip-

ples, combined

with an energy

fight between Saudi Arabia

and Russia that tanked oil

prices early this week, posed

hurdles that the 11-year-old

bull market wasn’t able to

overcome.

“It was a fun ride,” said R.J.

Grant, director of equity trad-

ing at KBW, of the 11-year bull

market. “All good things come

to an end.”

Mr. Grant said news of how

far and wide coronavirus could

spread spurred even more sell-

ing earlier in the week.

“Panic has taken hold to

some extent,” Mr. Grant said.

“You’re just getting people

that are not feeling good about

the state of the world.”

The Fed said Friday it would

accelerate planned purchases

of Treasury securities, buying

more than $30 billion in bonds

to address poorly functioning

markets. The move is the cen-

tral bank’s third notable step

since volatility gripped the

markets.

Earlier this week, it said it

would inject more than $1.5

trillion into short-term funding

markets on Thursday and Fri-

day to prevent ominous trad-

ing conditions from creating a

sharper economic slowdown.

Last week, it enacted its first

emergency interest-rate cut

since the financial crisis.

Continued from page B1

Dow Caps

Week With

9.4% Gain

FRIDAY’S

MARKETS

Investors are fleeing stock

funds at the fastest pace since

the bruising market selloff at

the end of 2018, while racing

into government bond funds at

a record clip.

They pulled $47.4 billion out

of global stock-focused mutual

funds and exchange-traded

funds in the three weeks ended

Wednesday, according to an

analysis prepared for The Wall

Street Journal by Bank of

America Global Research,

which began tracking fund

movements in 2002.

The only periods to ever see

larger outflows were the late

swoon in 2018 when investors

fretted about the pace of the

Federal Reserve’s interest-rate

increases and a stretch in

2008 in the midst of the finan-

cial crisis, according to the

Bank of America analysis,

which is based on EPFR Global

data.

The exodus coincides with a

brutal market rout. The S&P

500 has plunged nearly 20%

since peaking Feb. 19, losing

about $5.6 trillion in market

value along the way. Mean-

while, yields on Treasurys

have dropped to historic lows

as prices have rallied, drawing

investors in droves to the

safety of U.S. government bond

funds.

The outflows from stock

funds include $4.7 billion for

the week ended Wednesday, by

far the slimmest withdrawal

during the current market

slide. Over the period, inves-

tors poured $13.9 billion into

U.S. government bond funds—

the highest weekly total on re-

cord. That brings the three-

week tally of inflows to $26.2

billion.

Market observers say the

flight out of equities and into

havens underscores the panic

felt by some investors who see

few places to hide in a stock-

market selloff that has acceler-

ated as the number of corona-

virus cases has mushroomed.

“The outflows have been re-

ally staggering,” said Collin

Martin, a fixed-income strate-

gist for the Schwab Center for

Financial Research. “The envi-

ronment is so fluid right now

and there’s so much uncer-

tainty that it’s tough [for in-

vestors] to point to one spe-

cific thing and say, ‘The worst

is behind us, it’s time to jump

in.’ ”

Investors, meanwhile, are

frantically trying to gauge how

long the economic fallout will

last and how useful govern-

ment intervention will be. In

the short term, the Bank of

America data showed, they

aren’t optimistic.

Noah Seidman, a 37-year-

old engineer from Miramar,

Fla., said he pulled out of the

stock-focused mutual fund he

had through Fidelity Invest-

ments on Feb. 21 as the coro-

navirus began to receive more

attention. The following Mon-

day, the Dow Jones Industrial

Average dropped more than

1,000 points—in what would

be the first of many violent

selloffs over the next three

weeks.

Mr. Seidman—who says he

classifies himself as a long-

term trader, dabbling for years

in individual retirement ac-

counts, real-estate investment

trusts and battery-metal

stocks—says he realized that

“the writing was on the wall

that this was going to be one

heck of a year.”

Investors have cast aside

other investments beyond

stock funds. Investment-grade

bond funds saw their largest

week of outflows on record, at

$15.9 billion. Investors also

pulled $11.2 billion from high-

yield bond funds, the second-

highest on record.

BYCAITLINMCCABE

Market Rout Fuels Exodus From Stock Funds

Over the period ended Wednesday, investors poured $13.9 billion into U.S. government bond funds—the highest weekly total on record.

MARK LENNIHAN/ASSOCIATED PRESS