Displaying items by tag: bonds

(Washington)

The Fed announced an unprecedented monetary stimulus package this morning. The central bank declared that its new bond buying program was unlimited, and that it would immediately start buying hundreds of billions of different types of bonds in an effort to unclog credit markets. They also extended lending facilities to new markets such as municipal bonds.

FINSUM: The Fed has been far from shy to in reacting to this crisis, but nothing it is doing seems to be helping markets much. Post-announcement, the Dow is already down over 3%.

(New York)

If anything is becoming clearer about coronavirus’ effects on the economy, it is that job losses are going to be staggering. But what will be the knock-on effects? One of the many looks likely to be a serious credit crunch. Without income flowing in, many borrowers are going to be late or default on payments, which means lenders will run short on money and everyday companies will not get their normal cash flow. Not only will this hurt earnings and weaken credit ratings and corporate solvency, but it will likely cause a serious decline in consumer credit scores that will have a lingering effect on credit for years.

FINSUM: Everyone seems to be trying to mitigate this threat. Banks are suspending mortgage payments, credit bureaus say they won’t report delinquency etc. This is unprecedented, but it remains to be seen how it plays out (and for how long).

(New York)

We look like we are on the brink of a big downgrade in bonds that could spread chaos across the fixed income markets. Big rating agencies have not taken concrete steps yet, but investors have been assuming they will, as yields on BBB rated bonds have jumped, with $300 bn now above the 6% threshold. Many high-yielding companies, like airlines and cruise lines, have seen their yields skyrocket. According to Wells Fargo, “As the probability of a recession rises, so does the potential for downgrades and defaults, leaving us unwilling to wave the white flag for corporate credit”.

FINSUM: The downgrades are inevitable at this point, but at least the market has already been adjusting, so it will be less chaotic when it happens.

(Washington)

The Fed sent a big message yesterday (or at least it tried to). The US central bank made a surprise Sunday move on interest rates, slashing them to near zero and announcing more asset purchases. The cut amounted to a full percentage point in addition to $700 bn of asset purchases and various liquidity boosting measures. Despite the efforts, markets have not reacted well to the news. Two circuit breakers have been hit already since the announcement and the Dow was down as much as 10% in early trading today.

FINSUM: The Fed is taking the right steps, but doing them in the wrong way. Better guidance and signaling would have been very welcomed.

(New York)

In what comes as a very important sign for the wider US economy, lower rates and yields are apparently not flowing through to mortgages in the way that many expected. One of the bright economic spots in the big market volatility recently has been the hope that much lower rates would stimulate more housing demand. Mortgages rates have actually risen by 20 bp since March 5th despite the huge fall in Treasury yields. Even since mid-February (when the market was peaking), mortgage rates have only dropped 15 bp to 3.35% for a 30-year fixed.

FINSUM: This is very important because it takes a 75 bp fall for a typical homeowner to save money on a refinancing. We are not even close to that yet, so hard to see any economic boost coming.