Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Bond prices exploded higher in the early hours of Friday trading and negative U.S. Treasury and government of Canada bond yields are becoming a distinct possibility (if not yet probable).
I posted 10-year charts of both the U.S. and Canadian bond yields to show the remarkable scale of the overnight move. It’s been a decade of unprecedented central bank market intervention and yet the plunge in yields recently is by far the biggest, sharpest price change for the period.
There have been explanations for structurally low bond yields stated – central banks and demographic factors that have created a shortage of safe assets primarily – but today’s action is all about panic. Global investors are racing to park assets somewhere the negative economic effects of the coronavirus won’t hurt them as much.
S&P 500 futures were off the lows, indicating a 70 point loss at the open, at time of writing. I’d love to provide research links on the bond market but the sell-off started about midnight last night and I don’t have access to any yet.
“Treasury yields plummeted to record lows as concern about the impact of the coronavirus spurred demand for havens” – Bloomberg
“Coronavirus wreaks financial havoc as infections near 100,000” – Reuters
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The U.S. corporate bond market is the most important one for investors to follow today.
Credit Suisse strategist Andrew Garthwaite has repeatedly noted that widening of high-yield bond spreads – the average yield on junk bonds minus the Treasury yield – have signaled the end of seven of the last eight bull markets.
Unfortunately, high yield spreads are not easy to follow in real time. The Federal Reserve data site posts them daily but not intraday. The price change of the main U.S. high yield corporate bond ETFs will be a helpful indicator Friday. So far, the SPDR Bloomberg Barclays High Yield Bond ETF price remains well above the late 2018 lows.
“ @SBarlow_ROB JNK” – (ETF price chart) Twitter
“Stocks are still up but credit is screaming” (Bloomberg newsletter excerpt) – Twitter
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Ritholtz Wealth Management Director of Research Michael Batnick warned investors not to get brave in a blog post Thursday,
“The Coronavirus has slowed down travel and decimated these stocks like they’re banks in the financial crisis. The airline index fell more than 3% every single day last week. They fell nearly 4% on Monday, and another 9.3% today! Royal Caribbean went from $135 on January 17th to $65 today. Four years wiped out in 32 days. I understand the temptation to step in and buy, but catching a falling knife doesn’t usually work out well. According to a great study by J.P. Morgan, 40% of all stocks experience a catastrophic decline from which they never recover.”
“Don’t Catch a Falling Knife” – Irrelevant Investor
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Diversion: “Status and Beauty in the Global Party Circuit. I loved this book, my favorite of the year so far.’ – Marginal Revolution
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