◼ FINANCE Bloomberg Businessweek March 23, 202022
exponential growth of Covid-19 cases so hospitals
aren’t overwhelmed by a spike in critically ill patients
whoneedventilatorstobreathe.A re-steepeningof
theyieldcurvethathadflattenedisoftenthelast
monetary paroxysm before a recession. That’s what’s
happening now—largely in response to the fearsome
steepness of the viral infection curve.
Governments worldwide are getting serious about
fighting not only Covid-19 but also its economic effects.
British Prime Minister Boris Johnson announced
“wartime” funding to shore up the economy. Spain
brought forth a stimulus package worth as much as
a fifth of its gross domestic product.
In the U.S. the Fed has cut its benchmark federal
fundsrateby1.5percentagepoints,tojustabove
zero,intwoemergencymeetings,andit’spledgedto
buy$700billioninTreasuriesandmortgage-backed
securities.OnMarch 17 it saidit wouldbuycommer-
cialpaperdirectlyfromissuers—in effect, lending
money to big companies that have lost access to pri-
vate financing. Also on March 18, the Trump admin-
istration was discussing a plan that could amount to
as much as $1.3 trillion in spending—including direct
payments of $500 billion, or more than $1,000 per
person. Treasury Secretary Steven Mnuchin told
Republican senators that in the absence of govern-
ment action, in a worst-case scenario, the unemploy-
ment rate could rise to 20%.
Any other year, a decline in stocks like that of
March 16, when the S&P 500 fell 12%, would earn
banner headlines around the world. It got only one
paragraph on the front page of the next day’s New
York Times—pushed aside by news about the pan-
demic itself. But stocks do matter. The decline will
further sap consumer spending and business invest-
ment, deepening the recession. And the stock mar-
ket is incorporating, however imperfectly, the best
information the world has about the likely course of
this pandemic and its economic impact. What the
market is telling us is that things look pretty bad.
�Peter Coy, with Vildana Hajric and John Ainger● Credit Is the Scariest Market
WhiledropsintheDowandS&Pdominatethe
headlines,themarketthathasmanytradersand
policymakers most on edge right now is debt—that
is, bonds and loans. The free-flowing credit con-
ditions that defined the last decade are no more.
Weeks of virus-induced volatility have almost shut
down the markets for newly issued company debt,
and even short-term IOUs, known as commercial
paper, showed enough signs of stress to promptthe Fed to step in. With the usual corporate
fundraising outlets closed, companies including
Hilton Worldwide, Kraft Heinz, and Caesars
Entertainment are tapping credit lines to get fast
backup cash.
It’s a stunning‚ and sudden, seize-up in a cor-
nerofhighfinanceknownforfundingmegadeals
whileshruggingoffconcernsaboutcompanies’
ever-growing debt loads. Now there’s no way to
know just how bad the coming credit crunch will
be. “There’s a real concern for something that was
seen as almost impossible in the last few years,”
says Scott Macklin, director of leveraged loans at
AllianceBernstein. “We could face another credit
crisis. Companies need cash more than ever, but
the sources are slimmer.”
As the U.S. came out of the last financial crisis,
companies took advantage of rock-bottom inter-
est rates and loaded up on debt, helping total
business borrowings reach $16.1 trillion, up from
$10.2 trillion a decade ago. Investors lined up to
lend, in part because U.S. rates, though low, were
still much higher than those in Europe and Japan.
The ready supply of lenders allowed borrowers to
strip investor protections, known as covenants,
from risky loan contracts. Even as higher-quality
borrowers’ credit ratings slid toward the bottom
rungs of investment-grade, the money kept flowing.
Now the companies that borrowed big face a
reckoning. Strategists at UBS Group AG estimate
as much as $140 billion of investment-grade debt
may fall to junk this year, driven by energy com-
panies hit by a global demand slump and the
Saudi-Russian oil price war. The strategists expect
high-yield bond defaults to soar. “This feels like
a very acute, very sharp shock,” says Jim Caron,
head of global macro strategies for fixed income
at Morgan Stanley Investment Management. He’sAn Outbreak of Financial Stress
TheU.S.OfficeofFinancialResearchhasa measureofdailystressin globalmarketsbased on
33 variablesincludingyields,valuations,andrates.Hereit is bycomponent:
Credit Equityvaluations Safeassets Funding Volatility Overallscore▲Stressaboveaverage12/17/19 3/17/20840-4DATA: OFFICE OF FINANCIAL RESEARCH