The past week has been a wild ride for investors. The equity market gyrated in big swings for the entire week. The Federal Reserve’s emergency 50 basis-point reduction in interest rates to deal with the economic uncertainties associated with the impact of coronavirus was met with a wide range of reactions. I don’t believe lower rates will help in the short term to combat the challenges posed by the virus, as a coordinated global fiscal response would be a more effective approach to limit the economic impact. This needs to be associated with a commitment to provide ample liquidity for the unintended impacts of supply chain disruption and market volatility. Unfortunately, policymakers have not been able to agree on an approach or the need for this type of action. I have written in the past that markets dislike uncertainty more than negative news, and the growing wide-ranging impacts of behavior as a result of coronavirus create significant and unprecedented uncertainty.
The result has been U.S. Treasury yields dropping to record lows as a global flight to safety led to an insatiable bid for U.S. government bonds. The 10-year Treasury has now fallen below 1%, and dropped even further in the last two days to below 0.50% in the early hours of trading in Asia on Monday. The collapse in oil prices has also been unprecedented. Oil has fallen from $60/barrel at year end to around $30/barrel. The breakdown in the relationship between OPEC and Russia has prompted Saudi Arabia to cut prices and raise production.
Unfortunately, the probability of global policymakers and institutions making a mistake continues to grow, and the resulting fundamental impact for business and consumers continues to evolve. Like all crises, this will pass, but the biggest near-term concern is a liquidity crisis that further disrupts and dislocates the global system of economies and markets. In the end, staying disciplined with portfolio positioning and adhering to long-term goals with strong risk management are critical to success.
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High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
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