Price action in the market was downright ugly as coronavirus fears morphed from a risk-off event into a liquidity crunch.
Market participants struggled to find footing as most corporate bond trading effectively came to a halt. When spreads widened this much in 2016, it took almost 60 days while the spread widening during the latest market rout has happened in only 12 days. The impressive volatility that has occurred in markets is something we haven’t seen since the crisis era as the Cboe Volatility Index (VIX) closed at the highest level on record.
The 30-year and the 10-year Treasury yields dropped to the lowest levels ever as investors flocked to safe-haven assets.
The yield on the 10-year Treasury was slightly above 1.50% at the beginning of February, but by the end of the first week of March, yields had fallen all the way to 40 bps before popping back to over 1%. Other Treasury tenors behaved similarly with yields moving wildly throughout the month. Overall, we expect yield volatility to continue as investors continue to digest new information related to the coronavirus.
The message was clear from Jay Powell, in that the Fed is going to do whatever it takes to support the capital markets.
The Fed finally stepped up to provide liquidity to the markets, as they increased the repo operations to over $1 trillion and altered their T-bill purchase program to extend to all maturities across the curve. The message was clear from Jay Powell, in that the Fed is going to support markets with whatever they need to keep functioning. Until the dust settles, it wouldn’t be prudent to make an estimate on where 10-year Treasury yields will be, and therefore we will be making adjustments to our forecast in the coming months.
Economic data releases continue to be an afterthought as investors focused their attention on the coronavirus and its implications to growth both domestically and abroad.
Normally the employment report would be a highlighted event, but this economic data point was completely overshadowed by the risk-off sentiment in the market. Impressively, the economy added 273k in February and January was revised higher to 273k from 225k. The unemployment rate dropped to 3.5% and wages rose by 0.3%. Overall, a solid labor market report, but many investors overlooked this as they focused their attention on the implications of the coronavirus.
Get the full March 2020 Market Update here
The views expressed above reflect the views of Allianz Investment Management LLC, as of 03/2020. These views may change as market or other conditions change. This report is not intended and should not be used to provide financial advice and does not address or account for an individual's circumstances. Past performance does not guarantee future results and no forecast should be considered a guarantee either. Allianz Investment Management LLC is a registered investment advisor that is a wholly owned subsidiary of Allianz Life Insurance Company of North America. Allianz Life Insurance Company of New York is also a wholly owned subsidiary of Allianz Life Insurance Company of North America.