The early stages of the coronavirus shock to markets followed a familiar script: stocks fell hard while the government bonds that investors crave in times of stress shot higher. It was painful for many fund managers but a standard response to the risk of a looming global recession.
But that pattern has begun to break down, with big slides in safe assets at the same time as historic drops in equities. This week that intensified, creating a “sell everything” mindset that stunned industry veterans.
“[It] was mind-boggling,” said Bob Michele, chief investment officer at JPMorgan Asset Management. “I have been doing this now for almost 40 years, and this is the strangest market I have ever seen.” The lack of a reliable asset that rallies in bouts of nerves is unprecedented, he said.
Prices of government bonds, usually financial markets’ ultimate safe harbour and a key reference point for assets across the world, flailed wildly over the past five trading days. They frequently tumbled in tandem with stock markets as investors yanked money out of funds at a record pace and portfolio managers scrambled to sell whatever assets they could.
In the early stages of the pandemic, investors piled into government bonds, pushing the US 10-year Treasury yield to a record low of less than 0.4 per cent on March 9. The reaction was similar across the Atlantic: 10-year yields in Germany, Europe’s ultimate haven, collapsed to an unprecedented minus 1 per cent.
Since hitting those troughs, yields have climbed sharply, a rise that accelerated last week in erratic trading. As investors resigned themselves to a deep global recession, the 10-year Treasury yield peaked at nearly 1.3 per cent on Thursday, with Germany’s equivalent surging to minus 0.2 per cent.
A lot of fund managers had been set for a quiet year of steady returns. Instead, the value of their assets is plunging and many are being forced to hand money back to clients who would rather shelter in the safety of cash deposits.
“The industry as a whole is facing outflows,” said Andrew Wilson, chairman of global fixed income at Goldman Sachs Asset Management. “Our primary responsibility is generating the liquidity our clients want. All of us are having to sell the things we can, rather than the things we would want to sell in a calm market environment. That’s why this ripples right across everything.”
Bond fund managers complain of a lack of liquidity, particularly for riskier corporate bonds, as banks and other trading houses step back from markets. That means many are forced to offload more heavily-traded government debt in order to hand cash back to clients.
Central banks have been compelled to provide backstops for fixed-income markets, which have arrived at dizzying speed. After the Federal Reserve’s announcement of at least $700bn of asset purchases last Sunday failed to calm markets, the European Central Bank followed with €750bn on Wednesday and the Bank of England with £200bn on Thursday.
The recent losses for government bonds have called into question their traditional role in investors’ portfolios, where they typically serve as a counterweight that rallies as riskier assets fall.
“The value as a hedge is just not there,” said Rick Rieder, BlackRock’s chief investment officer of global fixed income. He said he had sold US government bonds over the past two weeks even as stock markets were melting down, judging that there was little potential upside in owning them — but plenty of room for declines.
With the Fed cutting rates to near-zero and relaunching bond purchases, 10-year Treasury yields look attractive based on valuations, but the volatility is off-putting, Mr Rieder said. “Now it makes sense to just own risk assets in smaller sizes and nothing else. The best hedge in our portfolio is cash.”
The world’s largest asset manager is not alone in this dash for liquidity. Investors pulled a record $109bn out of bond funds in the week to Wednesday, according to data from EPFR Global. Money market funds, which invest in cash-like short-term debt, have had record inflows. Treasury bills, which mature in one year or less and are seen as more akin to cash, have been in such high demand that yields turned negative this week.
Despite the recent rises, government borrowing costs in the big developed economies remain low by historical standards — largely thanks to central banks’ efforts. Bonds recovered some of their losses on Friday, although they did so together with a steadying of stock markets. The true test of bond markets’ solidity will come if and when there is a renewed dive in equity markets, analysts say.
One sign of investors’ frayed nerves is that volatility in the US Treasury market implied by options prices remains close to its highest level since 2009, according to an index compiled by Bank of America.
Within the past week, people have seen swings that “statistically speaking, should only happen every few millennia,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott. “Perhaps financial markets are a little broken.”
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
