6 International Financing Review March 21 2020Top news
Investors in frantic grab for cash as
dramatic outflows look inevitable
Bonds Bondholders monetise assets ahead of expected surge of outflowsBY IFR REPORTERSFixed-income investors are
cutting their exposure to risk –
even in assets they like – to build
a war chest of reserves in
preparation for a wave of
redemptions as markets price in
a global recession sparked by the
coronavirus pandemic and the
oil shock.The corporate bond sell-off of
the week before was joined last
week by a sell-off of US
Treasuries, German Bunds and
other government bonds, while
the price of spot gold fell to its
lowest price since November as
investors sold liquid assets to
raise cash. Short-dated paper
also took a hit as investors
scrambled for US dollars and
euros.
$ATAûFROMû2ElNITIVû,IPPERû
showed that US investment-
grade funds alone recorded netOUTmOWSûOFû53BNûINûTHEû
week up to March 18 as investors
sought refuge in the safest asset
of all. It is by far the biggest
weekly withdrawal from US
high-grade funds on record.
At the same time US-based
money market funds drew in
US$148bn, according to Lipper,
THEûLARGESTûINmOWûINûRECORDSû
dating back to 1992.
“In general it feels like
investors are jumping to cash,”
said John McClain, portfolio
manager at Diamond Hill Capital
Management.
“We will now see the
corporate deleveraging cycle.
Many companies are having
liquidity problems. You will see
an emphasis from investors for
companies to hold more cash
and have more revolver capacity.
h.OûlXED
INCOMEûMARKETSûAREû
functioning. Correlations have
broken down between different
risk assets and in terms of what
we are seeing [in being able] to
trade in the most liquid
markets.”
Traders say the proportion of
sellers to buyers in some credit
markets is huge. “You are
looking at ratios of six to one or
seven to one in selling-to-buying
enquiries,” said one emerging
markets trader.
The pressure on asset prices
prompted global central banks
to step in with an array of
measures, some last deployedDURINGûTHEûlNANCIALûCRISIS ûTOû
INJECTûLIQUIDITYûANDûSUPPORTûmOW û
especially in the commercial
paper and repo markets.
But even after these measures,
which included a spate of rate
cuts, the spectre of redemptions
hangs over the market.
Consequently, investors are
selling down positions even if
there is not a clear credit-driven
reason for doing so.
“You need to be very pro-
active and to make sure you’re
raising enough of a cushion,”
said another fund manager.
Some bankers advised taking
drastic action. “The whole world
should just suspend for a month.
3HUTûDOWNûALLûlNANCIALûMARKETSû
to very limited activity. Then
people’s asset values are held
constant. We just need to survive
as a global economy. And then
everything quickly goes back to
normal,” said a banker in Asia.ATTRACTIVE BUT DANGEROUS
Conversely, a European high-
yield investor said plunging
prices have meant buyers can be
incredibly well compensated for
the risk across most names and
sectors.
“There will be some names
where chances are elevated that
they’re not going to survive this
because their liquidity positions
are already tight or because
they’re in industries directly in
THEûLINEûOFûlRE vûHEûSAIDûh"UTû
discounting catastrophic-type
risk, prices have nothing to do
with fundamentals – they’re just
AûREmECTIONûOFûPEOPLEûTRYINGûTOû
grab liquidity.”
A high-yield syndicate banker
said the secondary market was
not operating rationally, as
investors scramble to assess the
economic landscape.
“It’s going to feel very painful.
But as we come out of this with a
better valuation on a lot of these
ASSETS ûTHEREûWILLûBEûSIGNIlCANTû
opportunities. The question is
though: who has the cash toinvest in those opportunities?”
he said.BUYING OPPORTUNITY?
One DCM banker said that these
buying opportunities had to be
weighed against forecasts of
recession and business failures.
“RCFs are being drawn; some
bridge loans are being
requested, including by
sovereigns; Danske Bank has put
OUTûAûPROlTûWARNING vûHEûSAIDû
“Every headline is
extraordinary.”
Danske Bank, Denmark’s
biggest lender, said on Monday
that it expected lower net
income this year and had
suspended its 2020 outlook due
to uncertainty in the
macroeconomic outlook linked
to the virus.But the high-yield investor
said there would eventually
come a point where valuations
looked attractive enough to buy
risk assets again.
“If I thought everyone could
clean up their positions and all
investors who already wanted to
get out and had already put
through redemptions had done
so, then I would consider
valuations attractive enough to
get into credit,” he said.
But he added the crux of the
matter was that few in the
markets believe the point of
complete capitulation has been
reached yet, meaning selling
Source: Refinitiv pressure is likely to continue. 0.0.0.0.1.1.1.1.1.03/02/202007/02/202013/02/202020/02/202026/02/202003/03/202009/03/202013/03/WHICH WAY NEXT?
THE YIELD ON 10-YEAR TREASURIES %“We will now see the
corporate deleveraging
cycle. Many companies
are having liquidity
problems. You will
see an emphasis from
investors for companies
to hold more cash and
have more revolver
capacity”“There will be some
names where chances
are elevated that
they’re not going to
survive this because
their liquidity positions
are already tight or
because they’re in
industries directly in
the line of fire”4 IFR Top news 2325 .p 2 - 12 .indd 6 20 / 03 / 2020 19 : 08 : (^58) IFR reprints ad A 4 2019 awards.indd 1 12 / 02 / 2020 11 : 40 : 40