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Market Commentary: Week of March 16, 2020


market-commentary-week-of-march-16-bodyWhat Happened

Well, that all went sideways in a hurry. Fear, uncertainty and more fear ruled the markets last week. Any semblance of liquidity exited every market sector as the phrase from investors, “I didn’t know that could happen” actually happened. The 30-year Treasury bond traded at a price as high as 135.09 (yield of .70 %) and as low as 104.875 (yield of 1.78%). With regard to liquidity in the world’s most liquid market, Treasuries, the Exchange Traded Fund (ETF), TLT, which tracks Treasury bonds with maturities greater than 20 years found its price Thursday at a 5% discount to Net Asset Value. That just isn’t supposed to happen as the normal discount is about .002%! Meanwhile, municipal bonds widened to record levels as evidenced by 10-year AAA bonds increasing in spread to 10-year Treasury notes by over 50 basis points. Agency Mortgage Securities widened dramatically (actually working to raise primary mortgage rates back over 4%). Equities experienced unheard of volatility. The fact that on Thursday we had the biggest percentage decline since October 1987 and the very next day, the biggest percentage increase since October 2008 speaks for itself. Almost forgotten in the insanity, crude started the week off for us by crashing nearly 30% Sunday night as Saudi Arabia vowed to flood the world with first, 10 million barrels a day and then a little later, 12 million per day. That sent oil and gas producers stocks, bonds and syndicated loans into a tailspin.

  • The S&P 500 was down 8.8% for the week. The average daily move for the week was 7.3%

  • The NASDAQ was down 8.2% for the week. The average daily move for the week was also 7.1%.

  • The 2-year Treasury dropped 2 basis points, closing at .49% Friday.

  • The 10-year Treasury increased 20 basis points, closing at .96% Friday

  • The VIX Index increased by 38%, closing at 57.83 Friday. On Thursday, the VIX hit 77.57 intra-day and closed at 75.47. The VIX all-time high is 80.86 on 11/8/08.

  • The MOVE index increased by 10%, closing at 138.4 Friday. The highest level since 2009. On Monday the index closed 163.7, its highest since the depths of the financial crisis.

  • 5-year Investment Grade Corporates (as measured by Markit CDX) widened 29 basis points, closing at 107 basis points Friday, a year over year high. 5-year High-Yield corporate debt (as measured my Markit CDX) widened 118 basis points, closing at 560 basis points, a year over year high.

  • US Dollar Index increased by 2.8%, closing at 98.75 Friday (high YOY 99.865, low YOY 95.76)

  • WTI Crude was down 23%%, closing at 31.73 Friday, the lowest closing year since the 2016 Winter

What’s going to happen?

Well, right after we wrote the initial Market Summary, The Fed cut the policy rate 100 basis points and announced a new Quantitative Easing round. They will buy $500 billion Treasury notes and bonds, and $200 billion Agency MBS. It looks to be over a 6- to 8-month schedule.

  • Will this bring interest rates down? Yes.

  • Will this handle the real problem, corporate credit, especially junk-rated credit? No.

We are not sure how lowering long term rates from 1% to near zero is going to help this unique situation we find ourselves in, but we can hope for the best.

Definitions:

An index is unmanaged and not available for direct investment. Definitions sourced from Bloomberg.

  • The Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index represents the portion of the Bloomberg Barclays Global Aggregate Index that measures the aggregate value of global debt with a negative yield.

  • The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

  • The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

  • The Cboe Volatility Index® (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of weekly S&P 500® Index (SPX) call and put options with a range of 23 to 37 days to expiration.

  • The ICE BofA MOVE Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of implied volatilities on the CT2 (Current 2 Year Government Note), CT5 (Current 5 Year Government Note), CT10 (Current 10 Year Government Note), and CT30 (Current 30 Year Government Note), with weights 0.2/0.2/0.4/0.2 respectively.

  • The Markit CDX North America Investment Grade Index is composed of 125 equally weighted credit default swaps on investment grade entities, distributed among 6 sub-indices: High Volatility, Consumer, Energy, Financial, Industrial, and Technology, Media & Tele-communications. Markit CDX indices roll every 6 months in March & September.

  • The Markit CDX North America High Yield Index is composed of 100 non-investment grade entities, distributed among 2 sub-indices: B, BB. All entities are domiciled in North America. Markit CDX indices roll every 6 months in March & September.

  • The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. Intercontinental Exchange (ICE) US computes this by using the rates supplied by some 500 banks.

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