The Kitchen Sink

April 2020 Capital ideas

If I’ve learned anything in the last few weeks, I now know what the Federal Reserve’s kitchen sink looks like! Since mid-March, in response to the worldwide COVID-19 crisis, the U.S. Federal Reserve has not only reduced the level of overnight interest rates to zero, but they’ve also revived many of the same emergency lending programs they used during the financial crisis. In doing so, they’ve effectively provided a $700 billion “backstop” for the bond and money markets, so that the biological crisis doesn’t turn into a prolonged financial mess as well.

So far, their efforts are working. After a historic rush to quality on the part of fixed income investors in the first half of March, the Fed has given investors confidence that they can redeem their cash when they need it. After a few squirrelly days, the fixed income market ended the first quarter in an orderly fashion.

On the fiscal front, Congress and the White House put aside their bickering and passed a $2 trillion bill to put money directly into the hands of people who need it most – workers and small business owners. Designed to provide a financial “bridge” while the economy is shut down due to coronavirus, this will likely not be the last major assistance bill passed by Congress. Discussions have already begun, for example, on additional funding for the Payroll Protection Plan legislation, which is expected to run out of funding by late April. Segments of the economy overlooked by the original package will also likely be addressed in future legislation.

The above events had a dramatic effect on U.S. interest rates. Rates on U.S. Treasury bills, which went negative for a few days in mid-March due to a scramble to safety, have since corrected back into positive territory. Longer-term rates have fallen to historically low levels. The two-year yield is currently 0.22%, and the ten-year yield is 0.75%.

On a positive note, during the quarter, bonds, in general, performed exactly as they should during a crisis. As stocks fell, bonds acted as a buffer against loss. During the first quarter of 2020, the Barcap Aggregate Index was up 3.15%, while the short-term Barcap Credit Index was down only 1.22%. Intermediate municipal bonds were flat to slightly negative. Given the circumstances (and particularly in comparison to 2008), bonds did what they are supposed to do – protect on the downside.

Nathan Boxx, Bradley Newman, Jason Seltzer

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