◼ FINANCE Bloomberg Businessweek March 23, 2020The Wall Street worry list is a long one right now.
One item is creeping up that list fast: Unreliable
safe-haven investments.
As stocks tumbled, some of the most shock-
ing moves came in the bond market. On March 18,
European government obligations including
German bonds were losing value at the same time
as stocks in the region. U.S. Treasuries also fell,
extending their decline a day after the biggest yield
jump for 10-year U.S. bonds since 1982. (Yields rise
when bond prices fall.) A similar dynamic took hold
earlier in Asia.● The Great Liquidation
they’ve woken up, investors are preparing for
the worst. Recession fears are running high, and
traders are slamming the sell button. “It’s bad,”
says Jeffrey Kleintop, chief global investment strat-
egist for Charles Schwab & Co., “but too early to
tell the size.”
At its worst point during the sell-off, more than
$10 trillion of equity value was erased, wiping out
three years of gains. Price swings exploded. The
Cboe Volatility Index, a measure of the cost of
S&P 500 options that’s used as a gauge of market
anxiety, jumped to a record high, exceeding levels
seen during the dark days of the financial crisis.
Traders have precious little data to go on. Many
companies have warned about weaker profits, but
few have offered specifics. With the first-quarter
reporting season weeks away, investors will have
to wait until April for a tally of the damage. The
lack of clarity begets more selling. According to
Bank of America Corp.’s latest monthly survey,
money managers are cutting equity exposure at
the fastest pace since at least 2001.
There have been glimmers of hope: In two
recent sessions, vows of fiscal stimulus from the
U.S. government gave stocks a bounce. But Tony
Dwyer, who’s paid to handicap equities as chief
market strategist at Canaccord Genuity LLC, says
for now he’s stopped making market forecasts.
He suspended his yearend target for the S&P 500,
saying the virus and the government’s response
to it have made things too unpredictable. “This
unknown element is something people just aren’t
used to,” says JJ Kinahan, chief market strategist at
TD Ameritrade in Chicago. “Unless somebody has
a crystal ball that I’m unaware of, and they’re like,
‘OK, I know exactly when this is going to turn and
what it means for earnings,’ how can you model
it out?” �Lu Wang and Vildana HajricSucha synchronizeddropisnotsupposedto
happen—investors often flee to government bonds
when stocks decline—and it’s a threat to classic
diversification strategies. Even gold was dropping.
“The worst outcome at the moment is there’s
nowhere to hide—your gold is falling, your equities
are falling, your bonds are falling,” says Klaudius
Sobczyk, a fund manager at PEH Wertpapier AG
in Frankfurt.
The trigger for the unusual stock-and-bond drop
was government announcements of stimulus mea-
sures to blunt the economic impact of the outbreak,
which will almost certainly lead a flood of new gov-
ernment bonds hitting the market. All major asset
markets are experiencing disruptions as investors
sell their holdings in a scramble for safety. “Our
best guess is that these [moves] have been exac-
erbated by margin calls, by the oil sell-off,” and
by hedge funds racing to get out of losing trades,
Citigroup strategist Matt King wrote in a note to
clients. “Basically investors have been liquidating
positions everywhere, whatever their rationale.”
What many investors seem to want now is the
same thing companies are hungry for: cash. At the
same time risky assets were falling, the huge but
more obscure markets that companies and insti-
tutional investors use to tap needed cash were
showing signs of stress not seen since 2008. This
pressure has triggered the Fed to unleash some of
its biggest weapons to keep banks flush and mar-
ketsfunctioningsmoothly.Thecentralbankoffered
trillionsofdollarsinliquiditythroughrepurchase
agreements. In essence, it said it would provide a
vast amount of short-term loans in exchange for
securities as collateral, giving them cash and cur-
tailing the need to potentially sell assets. It also said
it would buy as much as $700 billion in debt assets
and make it cheaper for foreign central banks to
get dollars. At the same time, the Fed slashed its
benchmark rate to zero to combat the mounting
threat of a recession.
When that didn’t quell the fire and signs
emerged that the part of the market that provides
corporate America with short-term credit was seiz-
ing, the Fed did even more. It restarted crisis-era
programs, including one to help U.S. companies
borrow using short-term debt known as commer-
cial paper. “The Fed is saying they will backstop the
markets with liquidity,” says Joshua Younger, head
of U.S. interest rate derivatives strategy at JPMorgan
Chase & Co. They are doing so because “these mar-
kets serve as a transmission mechanism”—caus-
ing the stress from the virus to turn into stress for
companies and ultimately banks. �Sam Potter,
Liz Capo McCormick, and Alexandra Harris24