March 18, 2020
10Y yields surge
Equities limit down
Nikkei -1.68% Dax -3.29%
UST 10Y 1.19%
Europe and Asia:
CAD CPI 8:30
USD Building Permits 8:30
Equity futures were limit down once again in Asian and European trade today as the COVID-19 news remained bleak with worldwide cases approaching 200,000 mark and deaths passing the 7,000 barrier.
Governments have struggled to respond to the fast-growing health crisis that is quickly morphing into the greatest threat to the global economy since the Great Depression. With much of the industrialized world on lockdown as authorities try to institute social distancing measures, economic activity has ground to a halt and governments are scrambling to respond with emergency measures that include a hodge-podge of UBI, grants and loans proposals.
As we noted yesterday most of these measures will fail miserably as they are way too slow, are generally means based which would require a massive bureaucracy to administer and are not generous enough to stave off the catastrophic drop off in demand.
In Europe, the Germans finally appear ready to consider joint debt issuance which is a much-needed change in order to socialize the stimulus benefits across the continent, but whether they go through with the commitment remains to be seen.
Meanwhile, there is a very troubling development in the bond market as global yields have surged despite the selloff in stocks. In Italy, the 10Y BTPs are at 2.90% while in US 10Y yields were as high 1.21% an 11% pop since yesterday. The conventional wisdom is that the selloff in bonds is simply a margin liquidation event as investors scramble for capital, but we suspect that is only part of the story.
The massive fiscal spending plans to be put in place along with a sharp drop off in tax revenues are likely creating a crisis of confidence in the sovereign debt market at the absolute worst time possible. If selloffs in equities now lead to a selloff in bonds the global financial markets will enter into a vicious cycle from which they will not be able to recover.
Bonds’ primary function during market selloffs is to act as a risk cushion to investor portfolios and if they instead act as yet another deadweight on returns the margin liquidation conditions that we have seen up to now will be nothing compared to will come over the next few days. That is why it is critical for central bank authorities to act as the buyers of last resort and announce that they will cap any yield rises in the long end of the market with unlimited QE. If the authorities do not act soon the markets could plunge very sharply today as investors find no safe harbors anywhere.