March 23, 2020
In a webinar recorded on March 18, 2020, Macquarie Fixed Income team members discussed the extraordinary market reaction in the face of the global pandemic, as well as challenges and potential prospects for the corporate and municipal bond sectors.
While no single playbook exists for this kind of crisis, there are playbooks for some of the key tactics being employed. Markets have been pricing in extreme uncertainty about the ability to deal with the pandemic, the financial fallout, and the depth and duration of the economic contraction that is already under way.
- “The global economy and markets have realized global governments don’t have a playbook for this unprecedented event,” said Daniela Mardarovici, co-head of Multisector/Core Plus Fixed Income.
- “We do, however, have the necessary playbooks for government intervention, as well as for the financial system so that it can withstand this kind of shock or even a series of them.”
Past crises and events provide a game plan for government and the financial system. Events such as the global financial crisis provided a road map for central bank response and also to strengthen the financial system.
- In a short period of time, the US Federal Reserve has taken a number of actions, similar to tools used during the financial crisis.
- Recent actions were more aggressive: On one day alone, March 16, the Fed bought $40 billion in Treasurys. At the height of quantitative easing (QE), the Fed was buying $40 billion per month. By March 18, the Fed had bought $162 billion in Treasurys in a matter of days. Other recent action taken by the Fed included slashing interest rates to zero, purchasing mortgage-backed securities, and establishing a liquidity facility for money market funds.
- There is also an existing playbook from a fiscal perspective. The federal government has, for example, sent checks to people in 2008, a proposal in the works now. FannieMae and FreddieMac have announced that they would postpone foreclosures to help more stay in their homes. Banks have undergone stress tests since the financial crisis for this very reason. Regulatory mechanisms put in place should help withstand the crisis and help ensure that corporations get access to liquidity.
It is important to keep perspective. Head of Municipal Bonds, Greg Gizzi, noted that the brief period of only eight trading days in March, with its unprecedented selloff, in the municipal bond and other markets, tends to feel much worse than the financial crisis.
- It is likely premature to say that the market is at the bottom; there are signs that typically occur when the muni market is excessively sold. Municipal credit is as fundamentally sound as it has been over a decade and more than two dozen states not only have surplus funds, but some even have excess surplus funds.
- Nontraditional buyers in the muni market may be telling. Individual investors typically make up about 70% of the municipal bond market. When nontraditional buyers, such as banks, life insurance, and property and casualty insurance companies, are crossing over to enter the marketplace because of extreme municipal bond value, it can be a bullish signal.
- The municipal bond team’s playbook is to try maintaining more cash in portfolios than under normal conditions, implementing tax-loss harvesting, and looking to add additional income to the portfolios.