The COVID-19 pandemic has caused unprecedented market volatility in recent weeks that has investors and traders scrambling to assess the economic and market impact of the aggressive containment measures.
This past week the CBOE Volatility Index (VIX), which measures the implied 30-day market volatility of the S&P 500 Index based on options contracts, measured its highest reading since its inception at over 82—besting the prior high set during the financial crisis in 2008-2009, shown in the chart below. That is saying something.
As market participants have sought shelter from the storm in traditional safe havens such as US Treasuries, gold, or cash, we have seen signs that liquidity has dried up. All that means is buyers have become more tentative, demanding lower prices to get trades done due to the historic volatility and heightened uncertainty. That in turn can lead to wider bid-ask spreads for market participants—both retail investors and institutions—and we sometimes see a dollar of value selling for 95 cents, if not less.
We have seen some of this in the corporate bond markets in recent days. Even short-maturity, high-quality investment grade corporate bond strategies have seen market prices disconnect with their fair value, as measured by net asset value (NAV). That metric essentially adds up the value of individual bonds in a portfolio such as an exchange-traded fund, which should in theory match the market price of the security that we all see on our screens.
“With market volatility, quality items go on sale to clear the racks because there aren’t a lot of shoppers walking through the malls,” noted Ryan Detrick, LPL Financial Senior Market Strategist. “Improving liquidity in all markets can help restore investor confidence after being shaken the past few weeks.”
At their worst, these conditions can translate into serious dislocations, such as those experienced during the financial crisis when banks didn’t trust each other enough to make overnight loans and credit froze up. Short-term lending is a necessary lubricant for economic activity.
Investors can get hurt selling into these dislocated markets. This is where the Federal Reserve (Fed) comes in. The programs the Fed launched on Monday, March 23—including buying large amounts of corporate bonds—are aimed at restoring health to credit markets. The central bank’s aggressive bond purchases (as much as needed) should help restore orderly trading in corporate bonds and narrow spreads, a measure of risk, which have widened significantly in recent weeks. As shown in the chart below, spreads are still well short of 2008-2009 highs.
There is some other good news here. These dislocations can present opportunities for buyers to get discounts they may not otherwise see in normally functioning market environments. We aren’t suggesting running out and buying securities trading at the biggest discounts to their intrinsic value. Instead, we are highlighting that attractive opportunities are emerging in the corporate bond market, particularly in strategies focused on strong companies that may emerge on the other side of this crisis as leaders of the economic rebound.
Recently, you may have seen reports that a record-low number of homes are available for sale—roughly 1.03 million nationwide. If you compare that to the average number of homes for sale during the past 10 years, it’s no surprise that many hopeful homebuyers are having issues securing a home. But why exactly is the housing … Continue reading “Forces Driving the Housing Market”
It can be exhausting trying to keep up with the whims of Wall Street. Lately, the financial markets have been fixated on federal taxes and what may be proposed on Capitol Hill in the weeks and months ahead. Wall Street’s focus on taxes closely follows its attention on the 10-year Treasury yield. And it wasn’t … Continue reading “The Whims of Wall Street”
President Joe Biden introduced the much-anticipated American Jobs Plan, which outlines an approach to spend roughly $2.2 trillion on the nation’s infrastructure and other projects. As part of the legislative process, the Biden administration also laid out a proposal for paying for the domestic investment. The plan includes raising the corporate tax rate to 28% … Continue reading “Paying for the Infrastructure Bill”
Financially, many of us associate the spring with taxes – but we should also associate December with important IRA deadlines. This year, like 2020, will see a few changes and distinctions. December 31, 2021, is the deadline to take your Required Minimum Distribution (RMD) from certain individual retirement accounts.
There’s an old Wall Street maxim that says, “markets climb a wall of worry.” And these days, there’s plenty to worry about with the trend in long-term interest rates and bonds.
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