As I was waiting on the Bloomberg television set for the Surveillance Special to start on Monday March 9, I remarked to host Jon Ferro: “look at that, the equity market is closing at its lows and Treasury yields have stopped falling. This isn’t good.” In retrospect, I had no idea how bad the next two weeks would be. They were the worst in my 39 year career.
The week of March 9 began the unanchoring of the Treasury market specifically and the bond market more broadly. As all assets prices fell, there was no apparent safe haven other than government money market funds. I had never seen that before except in 1981 when Fed Chairman Volcker had raised the Fed funds target rate to 20% as there was an oil-led inflation shock passing through the system. But, in all other panics and risk-off environments, money poured into US Treasuries and high quality bond funds. This time was genuinely different. The combination of margin calls, risk parity funds unwinding, lines of credit being drawn and the need to simply raise cash created tremendous selling of government bonds and bond funds. The system was not prepared and it caught market participants and central banks off guard. The central banks began to respond with some rate cuts, some credit facilities and some balance sheet expansion. But it looked uncoordinated and insufficient as we headed into the weekend. During the week, the 10 year US Treasury traded from a low of 0.31% on Monday to 1.02% as we went home on Friday. The central banks suddenly looked powerless and the bond market was in freefall. The bond market had broken.
On Sunday March 15, the Federal Reserve stepped in and cut rates 100 bps, expanded its balance sheet and started putting in place credit facilities. Other central banks also responded with overwhelming policy. Rate cuts, asset purchases, liquidity facilities and forward guidance were all thrown at the crisis. Monday was a day of hope. Ten year Treasury yields traded at about 0.75% and the markets were functioning. Then, all hell broke loose. The combination of the next round of system wide deleveraging, the reality of what lay ahead for the corporate world and the estimates of the amount of debt funding required for massive global fiscal stimulus effectively shut down the bond market and caused 10 year Treasury yields to soar to 1.27% by Thursday. What was surprising in all of this was that the central banks continued to escalate their policy response. An alphabet of liquidity programs designed to clear the system were being deployed. Asset purchases were increased. But nothing seemed to work. Then suddenly on Thursday afternoon, the market began to respond and the first sign of stabilization in two weeks occurred.
What happened? Policy makers around the world came together the week of March 16 and worked around the clock to fix the system. This is not to suggest they hadn’t been doing this earlier…..they just went into overdrive. They reached out to market participants and to each other to try to understand what was unfolding and take feedback on how things might be fixed. There are countless stories of JPM asset management leaders around the world working through every night with regulators, monetary authorities and government treasuries to help come up with a solution to stabilize the financial system. Everyone worked together to put the market back together.
This is not to say that there are only good times ahead. The pandemic will alter the economy and the corporate world for a long time. Central banks will continue to fine tune their policies to accommodate the funding needed for recovery. And bond yields will adjust depending where restructuring and default risks appear. But for now, government bonds are again a safe haven, money should come back into investment grade bond funds and the system is functioning. That buys governments time for a comprehensive fiscal policy response to be debated, agreed and deployed. Thank you to everyone who helped fix the market……job done.