Thursday, April 16, 2020

In Fed We Trust

In March, the market’s “fear gauge,” the VIX, reached 82.7, the highest close in its 30-year history. Daily moves in the S&P 500 averaged +/-5.0% and its 12.0% decline on March 16 was the worst day for the index since Black Monday in 1987. The New York Stock Exchange on March 23 closed the physical trading floor for the first time in its history and moved fully to electronic trading.

As headlines focused on the equity markets, the volatility in the fixed income markets was unrivaled. As investors looked to raise cash, dealers, who typically act as shock absorbers for the bond market, were not able to match panicked sellers with willing buyers. A lack of liquidity occurred in the fixed income market and extreme price dislocations occurred.

Issues were selling far below their intrinsic value. No segment of the bond market was left out, including Treasuries. Treasury yields collapsed in March to all-time lows and investment-grade credit spreads widened dramatically, experiencing an unprecedented 150 basis point move. Downgrades, especially in high-yield bonds, seemed unavoidable as the fear of “fallen angels” became reality. Extraordinary measures were required to stabilize the fixed income markets.

The Federal Reserve responded quickly, utilizing emergency rate cuts and unlimited quantitative easing. It slashed policy rates to near 0% and purchased treasuries, peaking at $75 billion per day, mortgage-backed securities, collateralized MBSs and agency MBSs. It established several swap lines to stem the heavy selling by foreign central banks that needed to raise cash.

In addition, the Fed announced a number of new targeted lending facilities to support commercial paper issuers, primary dealers and money market funds. It re-established the Term Asset Backed Securities Loan Facility to support credit to consumers and businesses. The Fed even agreed to purchase high-yield exchange traded funds and the fallen angels, or downgraded bonds issued by large corporations. It has essentially become the buyer of last resort for a broad spectrum of debt.

Altogether, the Fed has expanded or created nine lending programs and has agreed to provide up to $2.3 trillion in loans to entities that do not have ready access to the debt markets, including aid to states, cities and mid-small businesses. The Fed’s balance sheet has surpassed $6 trillion for the first time in its history. The Fed has clearly signaled it stands ready to do whatever is necessary to stave off a long-lasting recession.

If you have any questions, or would like to begin talking to a retirement plan advisor, please get in touch by calling (800) 388-1963 or email hbs@hanys.org.

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