Bonds: Total Market

(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)

The bond market looks primed for a big correction, says a top asset manager. Bonds have been surging in price as yields fall because of fears over coronavirus, but they seem likely to have a sharp pullback once the news cycle focusing on the virus moves on. That is the argument coming out of asset manager WisdomTree. According to the firm’s head of Fixed Income Strategy, if we have a sharp “V” shaped recovery, then bonds might see yields jump sharply (and prices fall sharply).


FINSUM: WisdomTree made one other excellent point that is not as obvious. US companies are starting to seek alternative suppliers away from China. As this happens, there is likely to be a transitory pickup in inflation since prices are probably going to be higher from suppliers outside of China. Accordingly, bond markets might also react sharply to a rise in inflation.

(New York)

Bonds have been in a bull market for the entire living memory of almost everyone in the financial industry. Yields are extremely low, prices are high, and stocks are peaking every week. Even if you are worried about bonds, the odds that they keep rising seem strong given some undeniably supportive factors. Those include a Fed that not only says it has no intention of hiking rates, but is actually undertaking a stealth form of QE by buying $60 bn of Treasury bills every month to make sure the financial system has adequate cash reserves.


FINSUM: Everything in the market is pointing to a repeat of the post-Crisis market paradigm—ultra-low rates, rising stocks. Should we expect a different outcome this time?

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