Financial Times Europe - 21.03.2020 - 22.03.2020

21 March/22 March 2020 ★ FTWeekend 11

MARKETS & INVESTING

A N N A G R O S S— LONDON

Poor countries affected by thecorona-
virus outbreak ill have to wait untilw
the middle of next month to find out if
the World Bank’sspecially designed
“pandemic bonds” ill release funds tow
help fight the disease. Some investors
are questioning whether they will pay
out at all.

The bonds require 84 days to have
passed since the outbreak date deter-
mined by the World Health Organiza-
tion, which is a milestone that will be
reached on March 23. But the World
Bank says it will take a further two and a
half weeks to determine if the final trig-
ger conditions for the bonds have been
met, meaning investors and govern-
ments will find out on April 9 at the ear-
liest.
Two classes of bonds were issued by
the Washington DC-based institution
three years ago, in a $320m deal
designed to help developing nations fac-
ing a serious outbreak of infectious dis-
ease.
The bonds deliver interest payments
to investors, funded by donor nations
Japan,AustraliaandGermany,untilcer-

tain criteria are reached. At that point,

investors are not repaid in full and some

of the funds are used instead to help

tacklethecrisis.

The bonds “are agimmick”, said Olga

Jonas, a senior fellow at Harvard’s Glo-

bal Health Institute, who worked at the

WorldBankfor33years.“It’sfairlyobvi-

ous that these triggers are too late to

stopanoutbreakearly.”

Investors are alreadypreparing for

steeplossesasallbuttwoofthesecondi-

tions avebeenreached;amongthem,ah

minimum of 2,500 deaths, and more

than 20 of them outside of the country

of origin. The World Bank’s external

modelling agent, Air Worldwide, now

has to determine that, on March 23, the

pandemic was growing at a rate above

zero in countries poor enough to be eli-

gible for funding, and that 20 per cent of

total reported cases have been con-

firmed.

David Strasser, senior portfolio man-

ager at Zurich-based Plenum Invest-

ments,whichinvestedinoneclassofthe

bonds, noted that the pandemic’s

growth had largely been halted in coun-

tries eligible for support from the Inter-

national Bank for Reconstruction and

Development (IBRD) or the Interna-

tional Development Association (IDA).

However, the growth rate is surging in

richercountriesthatarenoteligible.

“If this continues, we might be in a

strange situation where the bonds don’t

actually trigger,” he said. But most are

bettingthatthecriteriawillbemet.Ifso,

investors in the riskier Tranche B class

of the bond — which is now pricing at 13

cents on the dollar, according to an

aggregateoffourdealers—aresettolose

allofthe$95mtheyinvested.

Fixed income

Poor nations face long wait for ruling

on World Bank pandemic bond payouts

R I C H A R D H E N D E R S O N— NEW YORK

R O B I N W I G G L E S WO RT H— OSLO

Record amounts of money have been

pulled from the world’s investment

funds in the currentmarket turmoil,

putting global asset managers in the eye

of the storm and challenging an indus-

try struggling to navigate the end of a

record-breakingbullrun.

Mutual funds and exchange traded

funds that invest in bonds suffered

$109bn in outflows for the week ending

Wednesday, a new record that also

included the highest-ever weekly out-

flows for specialist junk bond and

investment-grade corporate bond

funds. Equity funds shed $20bn, the

second-highest sum this year, on top of

the record outflow of $23bn in the first

week of March, according to the data

fromEPFRGlobal.

While investors often ditch riskier

assets in moments of turbulence, such

as equities and junk bonds, the exodus

even from investment-grade corporate

debt and sovereign bond funds under-

scores the extent of a rush toward cash

that has been blamed for some of the

biggestmarketmovesofrecentdays.

Money market funds, which invest

largely in short-term government debt

and are used by investors as a proxy for

cash, soaked up $95bn of inflows in the

past week, extending last week’s record

$136bnhaul,EPFRsaid.

The sell-off is “fear-inducing for

investors”, said Liz Young, director of

market strategy for BNY Mellon Invest-

ment Management. “People don’t want

to own anything except cash and that

meanssellingacrosstheboard.”

Theoutflowshelptoexplaintherapid

intervention rom central banks andf

governments, which has included inter-

est rate cuts, asset purchasing pro-

grammes, emergency lending facilities

and fiscal stimulus o counter the pan-t

demic’sfinancialandeconomictoll.

They also point to the different char-

acter of the recent tumult, compared

withtheonsetofthe2007-09crisis.

Oliver Harvey, a macro strategist at

Deutsche Bank, points out that banks

were the locus of the last crisis but are

nowinmuchbettershape.“Theheartof

this crisis likely lies in the investment

community,”hetoldclientslastweek.

Fund managers always carry some

cash as a buffer to deal with potential

redemptions, but the worry is that out-

flows will force many to dump more of

their holdings and add to the sell-off in

the coming weeks. Many traders have

already pointed to redemptions and

deleveraging by hedge funds operating

intheUSTreasurymarketasonereason

for dislocations ntradingtherei.

Redemptions pose a test for many

investment groups, given how the very

low yields of recent years have pushed

money into riskier funds and tempted

funds to make riskier investments. The

IMF highlighted this danger in its latest

reportonglobalfinancialstability.

“This increased risk-taking may lead

to a further build-up of vulnerabilities

amonginvestmentfunds,pensionfunds

and life insurers,” the IMF said. “Low

yields promote greater portfolio simi-

larities among investment funds, which

may amplify market sell-offs if there is

anadverseshock.”

Cross asset

Global fund houses suffer record

outflows as flight to cash gains pace

‘The worry is that outflows

will force many to dump

more of their holdings

and add to the sell-off ’

Helping hand: the pandemic bonds

have been labelled a ‘gimmick’

FastFT

Our global

team gives you

market-moving

news and views,

24 hours a day

ft.com/fastft

TO M M Y ST U B B I N GTO N— LONDON
C O L BY S M I T H— NEW YORK

The early stages of the coronavirus
shock to markets followed a familiar
script: stocks fell hard while overn-g
ment bonds that investors crave in
times of stress shotup. It was painful for
fund managers but a standard response
totheriskofa apingg lobalrecession.g
But that pattern hasbegun o breakt
down, with safe assets sliding at the
same time as historic drops in equities.
This week, that intensified, creating a
“sell everything” mindset that left
industryveteransblindsided.
“[It] was mind-boggling,” said Bob
Michele, chief investment officer at
JPMorgan Asset Management. “I have
beendoingthisnowforalmost40years,
and this is the strangest market I have
ever seen.” The lack of a reliable asset
that rallies in bouts of nerveswas
unprecedented,hesaid.
Prices of government bonds, usually
financial markets’ ultimate safe har-
bourandakeyreferencepointforassets
across the world, flailedin the past five
tradingdays.Theyfrequentlyfellintan-
dem with stock markets as investors
tookmoneyoutoffundsatarecordpace
and portfolio managers scrambled to
sell thetradableassetstheycould,upen-
dingalong elationshipinmarkets.r
Earlyinthepandemic,investorspiled
into government bonds. The clamour
for safety pushed the US 10-year Treas-
ury yield o a record low of less than 0.4t
per cent on March 9. The reaction was
similar across the Atlantic: 10-year

yields in Germany, Europe’s ultimate

haven,collapsedto inus1percent.m

Since hitting those troughs, yields

have climbed sharply, a rise that accel-

erated last week in erratic trading. As

investors resigned themselves to a deep

global recession, the 10-year Treasury

yield peaked at nearly 1.3 per cent on

Thursday, with Germany’s equivalent

surgingtominus0.2percent.

This all reflects just how badly fund

managers are suffering after they had

expected a quiet year of positive but

unspectacular returns. Instead, the

value of their assets is plunging and

many are being forced to hand money

back to their clients, who would rather

hideinthesafetyofcashdeposits.

“The industry as a whole is facing out-

flows,” said Andrew Wilson, chairman

ofglobalfixedincomeatGoldmanSachs

Asset Management. “Our primary

responsibility is generating the liquidity

our clients want. All of us are having to

sell the things we can, rather than the

things we would want to sell in a calm

market environment. That’s why this

ripples right across everything.”

Bond fund managers complain of a

lack of liquidity, particularly for riskier

corporate bonds, as banks and other

trading houses step back from markets.

That means many areforced to offload

more heavily traded government debt

inordertohandcashbacktoclients.

Centralbankshavebeencompelledto

backstop fixed-income markets, with

bond-buying programmes that exceed

their response to the 2008 crisis in their

speed. After the Federal Reserve’s

announcement of at least $700bn of

asset purchases last Sunday failed to

calm markets, the European Central

Bank followed with €750bn on Wednes-

day and the Bank of England with

£200bnonThursday.

The recent losses for government

bonds have called into question their

traditional role in investor portfolios,

where they typically serve as a counter-

weight that rallies as riskier assets fall.

“The value as a hedge is just not

there,” said Rick Rieder, BlackRock’s

chief investment officer of global fixed

income. Mr Rieder said he had sold US

government bondsin the past two

weeks even as stock markets were melt-

ing down, judging that there was little

potential upside in owning them — but

plentyofroomfordeclines.

With the Fed cutting rates to near-

zero and relaunching bond purchases,

10-year Treasury yields look attractive

based on valuations, but the volatility is

off-putting, according to Mr Rieder.

“Now it makes sense to just own risk

assets in smaller sizes and nothing else.

Thebesthedgeinourportfolioiscash.”

The world’s largest asset manager is

not alone in this dash for liquidity.

Investorspulled record $109bn out ofa

bond funds in the week to Wednesday,

according to PFR Global. Money mar-E

ket funds, which invest in cash-like

short-term debt, have seen record

inflows. Treasury bills, which mature in

a year or less and are seen as more akin

to cash, have been in such high demand

thatyieldsturnednegativethisweek.

Despiterecent rises, government bor-

rowingcostsinthebigdevelopedecono-

miesremainlowbyhistoric tandards—s

largely thanks to central banks’ efforts.

Bonds recovered some of their losses

yesterday, although they did so together

with a steadying of stock markets. The

true test of bond markets’ solidity will

come if and when there is a renewed

equitymarketdive,analystssay.

Volatility in the US Treasury market

implied by options prices remains close

to its highest level since 2009, according

to an index compiled by Bank of Amer-

ica—asignofinvestors’frayednerves.

The past five days have witnessed

financial market swings that “should

only happen every few millennia”, said

GuyLeBas,chieffixed-incomestrategist

at Janney Montgomery Scott. “Perhaps

financialmarketsarealittlebroken.”

Operators blindsided by

fractures in norms under

pressure of pandemic

Government

borrowing

costs inbig

developed

economies

remain low

by historic

standards

A ‘sell

everything’

mindset is

taking industry

veterans by

surprise

Michael Probst/AP

Fund management. olatile timesV

Investment veterans grapple with

‘broken’ system of trading

P H I L I P STA F F O R D— LONDON

Banks and investors are pushing for

more detail oncontinuity plans from

the major stock exchanges, as traders

bed in for an extensive period ofwork-

ingaway romtheiroffices.f

Three trade associations — the Global

Financial Markets Association, the FIA

and Asifma — have been working on a

questionnaire to send toabout 20 of the

most systemically important compa-

nies, according to people involved in the

drafting.

It will include questions on the depth

andscopeofcoronavirusplans,whether

they have been stress-tested recently,

and who is responsible for them. It will

also ask how exchanges and other parts

of the markets’ infrastructure tackle

concernsoverslowerconnectionspeeds

for traders working from home, and

howtheyplantocommunicateonissues

suchasmarginandcollateralneeds.

The industry and authorities have

regularly updated these policies since

the September 11 terror attacks in 2001

but regulatory demands have soared

since the financial crisis. The virus dis-

ruption has added further pressure to

reviewthesearrangements.

Capital markets have swung wildly in

recent weeks, but exchanges, clearing

and settlement houses have broadly

held up. Practices designed to smooth

volatile markets, such as circuit break-

ers — which suspend trading after quick

anddeepdropsinprice—havekickedin

asexpected.

“Market supervision has become far

more automated and dynamic since the

last crisis. Everything is working as it

wasdesignedtodo,includinginthecon-

text of ‘working from home’ protocols,”

said Euronext, which operates six

equityexchangesaroundEurope.

That has helped exchanges to rebuff

the suggestion they should shut during

the coronavirus crisis. Still, the prospect

of months-long disruption to normal

practices has encouraged banks, bro-

kers and other market participants to

demand more information about

exchanges’businesscontinuityplans.

One person involved in the drafting

said it was so banks and brokers could

see the plan “at a glance” and make sure

therewasacollectiveeffortunderway.

Recipients will include the London

Stock Exchange Group and its clearing

houses in the UK, France and Italy;

futures bourses Intercontinental

Exchange and Eurex; Nasdaq Nordic;

Euronext; equities clearing house

EuroCCP; settlement houses Euroclear

and Clearstream; and Swift, the finan-

cialmessagingprovider.

Authorities have eased some regula-

tory requirements for traders working

remotely.But there are concerns about

potential conflicts of interest with other

people potentially able to overhearcalls

andtheabsenceofrecordedlines.

Equities

Traders seek

clarity from

major stock

exchanges

‘Everything is working as

it was designed to do,

including the “working

from home” protocol’

Government bonds caught in rush for cash

MOVE index (implied one-month volatility in the US Treasury market)

Source: Bloomberg

      





MARCH 21 2020 Section:Markets Time: 3/202020/ - 18:00 User:andy.puttnam Page Name:MARKETS1, Part,Page,Edition:USA , 11, 1