No end in sight for flight-to-safety trade
Uncertainty surrounding impacts from the Covid-19 virus has changed economic and market outlooks in a matter of days. We checked in with portfolio manager Andrew Kirschler for his take on a key haven asset: short-term government securities.
Q: What is the current state of the short-term government bond market?
The first warnings about potential impacts from Covid-19 launched a classic flight-to-quality trade that remains in force. This likely will continue for the foreseeable future given the lack of clarity around longer-term economic effects across global markets.
Q: Any thoughts about impacts from the expected second Fed rate cut?
As with the first 50 basis-point cut, it should offer much-needed support, but obviously is no panacea. At this point, the market has pretty much priced in at least a 75 basis-point reduction in the benchmark funds range when policymakers meet next week—this in coordination with cuts other central banks are making. The question is what further adjustments can be expected. The Fed already has taken steps to ensure liquidity in the banking system by increasingly its support to overnight lending markets—today and tomorrow, it plans to inject $1.5 trillion into the short-term funding markets. But depending on how deep or lasting the economic impact from Covid-19, the Fed and global banks may well use other emergency lending facilities to ensure the financial markets continue operating smoothly and keep credit markets from freezing up.
Q: Is there concern about a big rotation to stocks once the virus panic fades?
Following a great run for stocks, this crisis is bound to have a dampening effect on investors’ risk tolerance. There likely will be a longer-term assessment of the impact on jobs, manufacturing and consumer spending before widespread optimism returns.
Q: What are you watching?
We are watching all of the barometers of the risk market: commodity prices, currencies, consumer behaviors, fiscal action, employment, overnight markets, the global stock market—even the political environment. As those barometers point to greater risk—i.e. equities, currencies and commodities continuing to sell off—we expect to see investors holding or moving into shorter-term government securities.