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Emerging Risks Blog
The phoney war in markets


Patrick Kelliher

In my previous blog [1], I warned of a looming crisis in corporate bond markets as a result of the Covid-19 pandemic and intrinsic weaknesses in corporate bond fund liquidity. Sure enough, US investment grade corporate bond spreads rose from just over 100bps in mid-February to a peak of 401bps on the 23rd March [2] as the Covid-19 pandemic took hold in Europe and the US. With liquidity in the market evaporating, corporate bond ETFs started to trade at a discount to NAV [3].

This was linked with a wider market rout with both the S&P500 and FTSE100 falling by 1/3rd in the month to 23rd March. As investors fled to safety, 10-year yields on US Treasury Bonds fell from ca.1.6% p.a. to just over 0.5% p.a. by early March [4] with short-term Treasury bills even going negative for a short while [5]. Worryingly for the UK, long standing concerns over its reliance on overseas investors and the impact of Brexit lead to the pound collapsing from £1:US$1.31 to £1:US$1.15 [6]...

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