Unprecedented Stresses in US Financial Markets Has Investor Sidelining Trillions in Cash


Friday, Ultra Long-term US T-Bond futures moved about 1.3 pts a day on average in January, were down more than 7 pts on the day and off 36 pts from Monday’s high. Italian sovereign debt had imploded.

An index of costs to insure corporate debt with credit-default swaps surged the most since Lehman Brothers collapsed, and the CBOE Volatility Index (VIX) measuring costs to hedge against losses in US stocks was 43.20, the highest since November 2008.

In almost every single market, the difference between bid prices from buyers and ask prices from sellers soared.

As the novel coronavirus continued to spread during the week and was dubbed a pandemic by the UN’s WHO. Financial markets went into a tailspin and brought up concerns about their ability to function in times of crisis.

This is the 1st major test for the markets since reforms that were introduced after the financial crisis curtailed banks and brokerages from being able to provide liquidity during a turmoil, meaning to be a buyer and seller to clients when needed it most.

Uncertainty still surrounds the real impact of the virus, but know the facts, tune out the sound bites.

The evaporation of liquidity was evident across virtually all asset classes, but its absence was stark in securities which normally serve as havens and see their prices increase during a turmoil. That caused strange, unsettling moves as traders watched long-established cross-market relationships fade.

Treasury 39-yr yields unexpectedly rose after their swiftest declines on record, while gold fell, even as stocks suffered their sharpest 1-day fall since Y 1987. The cost to trade Treasuries spiked and order books thinned out to a degree last seen during the Y 2008 financial crisis.

Dealers do not have the risk appetite or the budget they normally have. But the inability to trade a US Treasury is unprecedented.

Thursday everything was sold: stocks, all forms of debt, Bitcoin, gold. It looked like a big margin call. We are seeing a large shift in investor preference away from anything but cash.

The rush for USDs introduced is rarely seen levels of stress into foreign exchange and funding markets. Currency volatility almost tapped marks last seen in Y 2008 and demand to bet on a rally in JPY over the coming week in the options market hit a record.

Some of the stresses were alleviated late Thursday and Friday after the Fed said it’s prepared to inject a total of more than $5-T in cash into funding markets over the next month to ease the cash crunch. It also started to purchase Treasuries across the yield curve. And, at the lease, it should alleviate the need for banks, corporations and investors to hoard Bucks.

It means that financial markets do not need to hoard liquidity in the way many consumers have been hoarding Johnny (toilet) paper, and it shows the Fed has learned the lesson of Y 2008, that being pump in liquidity, as President Trump has been demanding.

Have a terrific weekend, do not Panic!

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