Jim Cielinski, Global Head of Fixed Income, discusses some of the most pressing issues facing fixed income markets as the coronavirus crisis unfolds and reminds us that the common thread in all crises is that they end.

Key Takeaways

  • The genuine uncertainty surrounding the coronavirus pandemic has created extensive panic among investors, leading to some unusual market movements.
  • The rules have changed, particularly as it relates to policy intervention. But as with every crisis, new tools will come to the fore to help curtail the impacts of the pandemic.
  • Rather than trying to predict the magnitude of these market moves, investors should remain mindful of their time horizon and risk tolerance as they navigate a changing environment and persistent volatility.

What effect has the coronavirus had on fixed income?

Jim Cielinski: The effect that coronavirus has had on fixed income markets has been truly breath-taking. We have seen in the first quarter some of the worst performance in risk markets that we have seen in history and certainly since 2008. Many valuations such as credit have gone from being in the most expensive decile to now in many cases in the cheapest decile in the space of 30 to 45 days. So this is truly, I think, shocking. The speed of this adjustment is what has caught people off guard. Effectively, what we have done is shut down a global economy and we have done that in the space of a month. Markets are not prepared to deal with those types of risks and the genuine uncertainty that we are seeing today has really created a lot of panic in the markets.

Are you surprised by some strange market moves?

Markets in periods of stress always do things that you do not expect or do not adhere to those time-tested relationships and this time is no different. Bonds tend to go up in value when risky assets like equities go down. And that was holding true until very late in the quarter. But you begin to see just general asset deleveraging and I think almost every financial asset was for sale. And when you see that you start to see prices on virtually safe assets, all assets, safe, risky, credit, equity, they are all going down together. And that is often by the way a sign that markets are in that explosive sell-off stage. And so in some ways it feels very strange when it is happening but it is often not a reason to panic. I think those relationships do tend to reassert themselves. But I think here we are just seeing asset selling. Many people thought it meant that supply or inflation expectations related to big fiscal packages were going to overwhelm the bond market. I do not think that was the case.

How might this end?

I do think whenever you have these kinds of huge corrections and movements in markets people just want to know what is next. And I would focus on identifying the signposts. First of all, do not focus on trying to predict the magnitude of these moves. I think that is extraordinarily difficult. We have talked about some of the things you need for a crisis to draw to a close. Put those up on the map. And as those happen feel more confident taking risk but recognise too that bear market rallies can be sharp and severe. People do not want to miss the opportunity to buy in, so they can often be too early. And, for me, knowing where the opportunities are is always critical. But I hear that every time there is a big correction it is all about the opportunities. But equally understand that there are risks that are different. Understand the opportunities but put those in context with the risk. Make sure whatever you are doing fits with your objective but also fits with your time horizon. In these markets, we all tend to make trades that might make us look rather foolish on a one- or two-week period. The important thing is to adapt your time horizon and recognise that volatility is going to be a constant companion for many months to come and take positions by putting things on in a size that will not force you out if the volatility goes against you. So, I think these are periods where you can step back. Know the rules have changed. We are talking about things, perhaps, like helicopter money. We are now at zero rates almost everywhere. We are probably going to hear a lot more discussion around Modern Monetary Theory (MMT). Do deficits even matter? We will hear about yield curve control. The old policy playbook in a matter of a month has played out so we have used what we did in 2008. Now new tools will come to the fore and that is true for every crisis. So be prepared for the environment to change and markets to move a lot. Volatility will persist and recognise that there are opportunities and risks out there.