Financial Times Europe - 10.03.2020

Tuesday10 March 2020 ★ FINANCIAL TIMES 19

MARKETS & INVESTING

TO M M Y ST U B B I N GTO N— LONDON

The UK joined the club of nations with
negative-yielding debt for the first time
yesterday as investors bet on further
interest rate cuts to ease the effects of
the coronavirus outbreak.

As theprice of oil plunged y a fifth andb
stock markets in Asia and Europe tum-
bled, buyers were prepared to pay the
highest prices on record for government
debt, which is traditionally seen as a safe
place to ride out turmoil.
The resulting fall in yields meant that
bonds of maturities up to seven years
dipped below zero in early London trad-
ing. The two-year yield traded as low as
minus 0.04 per cent while the 10-year
benchmark yield touched an all-time
low of 0.08 per cent.
“Right now, people are willing to pay
up for safety,” said Chris Jeffery, a fixed
income strategist at Legal & General
Investment Management.
The move means that some investors
are prepared in effect to pay the UK gov-
ernment to borrow, ahead oftomor-
row’s budget.
Negative yields mean that investors
who buy a bond and hold it to maturity

are guaranteed to lose money in nomi-

nal terms. Beforeyesterday’s moves, UK

government bond yields had not traded

in negative territory.

Unlike central banks in the eurozone

and Japan, the Bank of England has

never set interest rates below zero.

Outgoing BoE governor Mark Carney

said last year that negative interest rates

were “not an option” in the UK.

European Central Bank policymakers

said similar things, Mr Jeffery high-

lighted, before its own move below zero.

The BoE is now under increasing pres-

sure to cut rates in response to the coro-

navirus threat after the US Federal

Reserve last week announced an emer-

gency half percentage point rate cut.

Traders are betting there is a more

than 50 per cent chance of a rate cut to

0.25 per cent, from 0.75 per cent, at the

next BoE meeting this month, according

to CME data.

That would take rates back to the

record low seen in 2016 after the Brexit

vote. Negative yields in bond markets

suggest some investors think the BoE

might have to go further, perhaps set-

ting aside its aversion to sub-zero rates.

“In the face of today’s meltdown in the

financial markets, the bank may be

forced to act soon,” said Ruth Gregory of

Capital Economics.

Along with a rate cut, the BoE is likely

to come up with a package of cheap

financing for companies worst hit by the

coronavirus and oil slump, she added.

In the eurozone, several governments

are able to borrow at deeply negative

rates. All of Germany’s bonds trade at a

yield below zero and its 10-year bench-

mark touched an all-time low of minus

0.91 per cent esterday.y

Fixed income

UK joins negative-yielding debt club for

first time with investors opting for safety

J O E R E N N I S O N

The riskier end of the corporate bond

market has suffered a sharp blast of

nerves in response to the slump in oil

with prices dropping and the cost to

investors of insuring against defaults

rising higher in Europe and the US.

After the dispute over production levels

between Saudi Arabia and Russia

erupted over the weekend, sending oil

prices down by more than a fifth in

trading yesterday, bonds issued by US

shale producers felt the strain.

Whiting Petroleum’s bonds maturing

next year, downgraded last week by S&P

Global, fell to 18 cents on the dollar by

latemorning yesterday in New York,

down from almost 100 cents on the

dollar in January and 57 cents at the

start of March.

Occidental Petroleum’s bonds matur-

ing in 2049 dropped about 30 cents on

the dollar esterday morning to abouty

55 cents.

Elsewhere,Antero Resources’ 2023

bond fell from more than 50 cents on the

dollar to around 30 cents.

The cost of insuring against the

default of US high-yield bonds briefly

rose above 600 basis pointsyesterday,

surpassing its peak during the last

period of turmoil for energy debt in

2016, before falling back to 550 basis

points, according to data from IHS

Markit.

The stress isstirring concerns hatt

investors could be in line for pain across

the asset class.

“The weekend oil market develop-

ments could barely have come at a

worse time for the US high-yield

market,” said Craig Nicol, an analyst

at Deutsche Bank. “The big question,

though, is contagion to the broader

high-yield market outside of energy.

In our view, it is inevitable,” he added.

Safer corporate bonds are already

creaking with investment grade default

protection also jumping as high as 130

basis points, the highest level since 2011,

marking the biggest run-up since the

collapse of Lehman Brothers in 2008.

Meanwhile, BlackRock iShares’ high-

yield bond exchange traded fund,

known by its ticker HYG, sank 5 per cent

in morning trading, reaching its lowest

price since the end of 2018.

A number of other energy companies

that have loaded up on debt have also

already suffered, includingLaredo

Petroleum,Oasis Petroleum,Range

Resources nda California Resources.

Natural gas providerChesapeake’s

bonds maturing next year fell from 70

cents on the dollar to 51 cents.

“We are on the cusp of a new round of

energy company restructurings, both in

and out of court,” said John Dixon, a

high-yield bond trader at Dinosaur

Financial Group.

“With many of these companies

already spending more than [their]

cash flow, look for draconian cutbacks

in capital expenditure, which will fur-

ther crimp already distressed servicers

and suppliers,” he added.

Access to bond markets has already

become strained for energy companies,

raising the risk that they will be unable

to refinance their debt, pushing them

into bankruptcy.

Fixed income

Riskier bonds hit hard after crude output

battle takes toll on US shale producers

‘We are on the cusp of a

new round of energy

company restructurings,

both in and out of court’

Last year Mark Carney said negative

interest rates were ‘not an option’

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R O B I N W I G G L E S WO RT H , P H I L I P
STA F F O R D A N D E VA SZ A L AY

The biggest oil price crash in almost
three decades has deepened themarket
stress caused by the coronavirus out-
break, leaving traders reeling and
leading to mounting signs of strain and
dislocation n financial markets.i
Government bonds have been shoot-
ing higher and stocks have been sliding
for more than two weeks but while
prices have moved a long way, market
conditions have been mostly smooth
and orderly.
That started to crack yesterday. After
Saudi Arabia’s decision over the week-
end to start an all-outprice war ents
crude crashing, currencies and stocks
began to move unusually sharply.
“Today is the first day when we can
see markets become really dysfunc-
tional,” said Luca Paolini, chief
strategist at Pictet Asset Management.
“This feels really bad.”
Signs that yesterday would be a
historic day for markets became clear in
the first light of day in Asia when US
equity futures on the hicago Mercan-C
tile Exchange umbled 5 per cent and hitt
their permitted trading limits.
The CME, the world’s largest futures
exchange, also raised margins on a
series of interest rates, currencies, met-
als and agriculture futures overnight.
When Asian stock markets opened,
Japanese equities quickly slipped into a
bear market — defined as a 20 per cent
drop from their recent peak.
Asian currencies markets also saw
large swings that pushed the Japanese

yen to its highest point against the dollar

since October 2016. More alarmingly,

the Australian dollar shed 3 per cent of

its value in just three minutes to hit its

lowest level against the dollar since the

financial crisis.

The Australian currency had been

under pressure in the 20 minutes lead-

ing up to the crash but at 1:49am in Lon-

don the exchange rate lurched lower,

sinking to almost $0.63 in just a minute

before recovering to around $0.645.

“It was definitely a flash crash in my

view,” said Xavier Porterfield, head of

research at data group New Change FX.

It proved a sign of things to come

when European markets started

trading. Dozens of stocks on the ondonL

Stock Exchange were temporarily

suspended when the market opened.

OnXetra, the German exchange,

there were 1,300 “volatility interrup-

tions” — when trading is slowed down —

within the first three hours. That

surpassed the total on the day after the

UK Brexit referendum in 2016.

The stress continued when the US

stock market opened with the S&P 500

immediately sliding 7 per cent and trig-

gering a marketwide “circuit breaker”

designed to curb panicked selling by

forcing a 15-minute halt to trading.

That was the first time the measure

had been used since it was introduced

in 2013. But the pause provided little

respite.

“Markets were already grappling with

an unknown and uncontrollable prob-

lem with the coronavirus and now

they’ve been hit by a huge oil shock,”

said Peter van Dooijeweert, head of

institutional hedging at Man Group.

“We’re seeing signs of stresses every-

where.”

Although the last few weeks have

been volatile, this was a new degree of

turbulence.

In the initial stages of the sell-off in

late February, investors and traders

stressed that markets had been orderly.

Butliquidity as been deteriorating inh

many important markets. That has

meant that falls have become sharper

and more jagged than normal.

By yesterday, trading conditions were

exceptionally difficult. “It feels like eve-

rything is creaking right now,” said one

equities broker who declined to be iden-

tified. “It’s just fear and panic in the

same way that a member of the public

goes out and bulk-buys toilet roll.”

The most noticeable example is in the

US futures market. Its “depth” as

measured by how many contracts are

quoted near the best price has collapsed

by about 90 per cent from mid-

February, according to JPMorgan.

Traders and fund managers also said

deteriorating liquidity is apparent in

the bond markets.

Even highly rated government debt,

normally the most tradable of asset

classes, has not been immune as the

spreads between offers and bids have

widened.

“There have been some air pockets

before but today is the first really big

one,” said Mike Riddell, a fund manager

at Allianz Global Investors.

The US Federal Reserve is taking steps

to try to ensure market conditions do

not deteriorate further. It said yesterday

that it wouldpump extra iquidity intol

short-term lending markets.

The measures come at a time when

many trading floors have been hollowed

out with several banks and hedge funds

allowing employees to work in disaster

recovery sites, orfrom home, to mini-

mise the risk of spreading disease.

Traders report that the relocations

have taken effect at a tough time — just

as volatility has picked up and volumes

have doubled.

Mr van Dooijeweert said: “How much

risk do you feel comfortable with when

you’re working from home? For trading

desks and asset managers, that will

just compound the problem of poor

liquidity.”

Crude price crash compounds

woes for range of investments

hit by the coronavirus crisis

‘It’s just fear

and panic

in the same

way the

public goes

out and

bulk-buys

toilet roll’

TheIndonesia

Stock Exchange

in Jakarta was

one of many

bourses that saw

steep declines

yesterday

Adek Berry/AFP/Getty

Cross asset. ounting strainM

Trading stability begins to fray

as oil slump piles on pain

C O L BY S M I T H —NEW YORK

B R E N DA N G R E E L E Y —WASHINGTON

The US Federal Reserve saidyesterday

that it will increase the amount of

money it is pumping into short-term

borrowing markets during the current

turmoil, reversing an attempt to wean

investors off financing it has been pro-

viding since September.

The move comes as nerves grow that

market gyrations caused by coronavirus

are harming funding conditions for

banks and investors. It marks the next

phase of the US central bank’s efforts to

contain the fallout, following anemer-

gency interest rate cut last week.

The New York arm of the Fed said it

would boost the size of its overnight and

short-term operations in the repo mar-

ket “to support smooth functioning of

funding markets as market participants

implement business resiliency plans in

response to the coronavirus”.

The repo market is where investors

borrow cash for short periods in

exchange for high-quality collateral

such as Treasuries. The Fed will offer at

least $150bn in overnight loans —$50bn

more than was originally on offer —

until March 12. It will also raise the limit

on thecash it will lend into the market

over a two-week period from at least

$20bn to at least $45bn.

“We have not seen funding markets

lock up, but this is the Fed’s way of

ensuring that funding markets stay

open,” said Gennadiy Goldberg, senior

US rates strategist at TD Securities.

TheFed has injected billions of dollars

into the repo market since a cash crunch

in September sent the cost of borrowing

overnight soaring, although it had been

scaling back the interventions.

The reversal came after crude prices

crashed more than 20 per centyester-

day in response to a price war between

Saudi Arabia and Russia that threatens

to flood the oil market with supplies just

as the coronavirus hits demand. The

drop in oil sentstock markets plunging

and government bond yields torecord

lows. Corporate bonds have also taken a

heavy knock, especially those issued by

the most heavily indebted companies.

Since global markets started sinking

in late February, investors have clam-

oured to use the short-term funding on

offer from the Fed. Demand has reached

more than three times the available

funds on offer for most two-week loans,

while some overnight operations have

also been oversubscribed.

The Fedsaid its ramped-up repo oper-

ations were aimed at mitigating any risk

of money market pressures bubbling up

that could adversely affect its ability to

implement its monetary policy

Analysts and investors are increas-

ingly nervous that instability in stock

markets due to oil prices and the virus

outbreak could become a more funda-

mental threat to financial conditions.

Fixed income

Fed seeks to

limit fallout by

boosting repo

injections

‘We have not seen funding

markets lock up, but this is

the Fed’s way of ensuring

that they stay open’

Vix hits highest level since 

Source: Refinitiv

CBOE Vix volatility index



    

MARCH 10 2020 Section:Markets Time: 3/20209/ - 17:43 User:stephen.smith Page Name:MARKETS1, Part,Page,Edition:EUR , 19, 1