SIFMA is the Securities Industry and Financial Markets Association, and that organization recently released a report on how markets have responded to coronavirus.
The verdict from SIFMA is mixed.
“Market performance has been a mixed bag, varying by asset class & across subcategories within,” SIFMA found, “One commonality is that improvement in market fundamentals is directly linked to Fed operations.”
“This report analyzes market trends from the start of the year through June 15. The COVID-19 led economic and market shocks created enormous one-way flows from risk to safe assets, and the flows were beyond the capacity of the financial system. The volatility was exacerbated by dealer balance sheet constraints, caused by post global financial crisis regulations, which limited balance sheet capacity and the ability to fully support customers under extreme market stress and to act as an intermediary between the official sector and the economy. This created substantial liquidity constraints in many fixed income and structured products markets.” The report continued. “The early signs of the market turmoil began in the first few weeks of March in the repurchase agreement market (repos; used to aid secondary market liquidity for the cash markets like U.S. Treasury securities/UST and provide funding to dealer market making operations). The secured overnight financing rate (SOFR), a reference rate for the U.S. based on the overnight repo markets, moved outside of the fed funds rate range, a rare occurrence and a sign of stress in the repo markets.”
The report noted that the US corporate bond market has seen a nice recovery, “There is still stress in some areas of the credit markets, as the Fed’s latest program to purchases the bonds themselves (announced in June) is not quite operational. High yield bonds continue to show stress, while most of investment grade has recovered. Looking at issuance trends as an indicator, investment grade issuance was strong in March through May (+178% to 2019 levels on average); high yield essentially stopped in March (-85% to 2019 levels) but had recovered well by May (+60% to 2019 levels).”
The recovery for mortgage backed securities was more mixed on the other hand, “The MBS and ABS recovery has been uneven across segments. Direct purchases by the Federal Reserve (Fed) calmed the agency MBS market, while off-the-run, specified pools of structured products and collateralized mortgage obligations (CMO) took longer to reach equilibrium. Non-agency RMBS (residential MBS) and CMBS (commercial MBS) markets remain somewhat fragile, as dealers continue to be reluctant to take on risk. Credit risk transfer securities (CRT2 ), particularly the oldest vintage of transactions, still have pockets of stress, and the ABS recovery varied by sector. While these markets have calmed, not all segments have recovered fully to pre COVID-19 levels.”
The report also noted, in an important observation, that coronavirus has threatened liquidity but not yet solvency, “To date, the COVID-19 crisis has been a liquidity event, not yet a solvency event. However, should the virus resurgence cause a mass resumption of lockdowns, and these shutdowns last longer, unemployment will remain high and we will move closer to a solvency event. Companies in highly impacted sectors could (and have) experience credit rating downgrades, which increases a company’s cost of borrowing, and potentially defaults. This would exacerbate the country’s economic stresses.”
SIFMA is, “the voice of the nation’s securities industry, bringing together the shared interests of hundreds of broker-dealers, investment banks and asset managers. We advocate for effective and resilient capital markets,” according to its website.
