Wednesday marked yet another catastrophic day across assets, as equities careened lower and bond yields surged, wreaking havoc on balanced portfolios, in a continuation of the recent “sell everything, go to cash” trade.
On top of the rolling “VaR-down” environment, the bond rout is being exacerbated by the sudden realization that massive fiscal stimulus (and thereby potentially massive supply to fund it) is in the offing.
US yields climbed by as much as 20bp at the long-end of the curve, where 30-year yields hit 1.928%, the highest since February 28 (i.e., the highest since the day things started to unravel in earnest). 10-year yields jumped as much as 18bp to 1.259%. Bear in mind, this comes on the heels of Tuesday, which was the worst day for Treasurys since 1982.
If you held, say, the simplest of simple balanced portfolios, you suffered a catastrophic hit on Wednesday – and by that I mean a one-day loss of around 10%.
What you see in the following visual is an unmitigated disaster for anyone depending on bonds to hedge your equity exposure.
I spent a ton of time discussing this on Wednesday morning, both the narrow context of this week’s cross-asset armageddon trade and in a broader political context. If you haven’t read “‘When Risk Parity Goes Wrong’ And The Coming ‘New World Order’” yet, I would strongly encourage you to peruse it at your leisure.
Here’s another way to visual the same thing:
And here’s the latest read (current through Tuesday) on Nomura’s risk parity exposure model:
As horrible as things suddenly are for bond-stock correlation investors, crude is now squarely in “are you f**ing kidding me?” territory.
WTI fell to a $22-handle on Wednesday. If you measure from the peak ahead of Q4 2018’s bear market collapse, oil is down 70%.
Pretty soon, gas is going to be a loss leader at gas stations. “Buy a Slurpee and a Snickers and we’ll throw in five free gallons!”
In FX land, Wednesday was chaos – utter chaos. There’s (much) more in “Ablaze“, but ING’s Chris Turner called it “armageddon”.
“Everything that could be sold was sold against the dollar. We’d be foolish to argue that this can turn around anytime soon [and] we may start to hear talk of intervention at least to calm disorderly markets, if not weaken the $”, Turner wrote Wednesday afternoon. He went on to deliver the following rather poignant assessment:
Despite some large-scale measures to address dislocation in USD funding markets, the dollar advance has not slowed. Instead, it has accelerated in a disorderly fashion. 4%-7% moves in the dollar against the likes of GBP and NOK are extremely rare. One-week implied volatility in the $/G9 pairs are in the 15-25% range, $/NOK at 40% – a new all-time high.
The moves smack of massive de-leveraging and a run into dollar cash – bearing all the hallmarks of a massive margin call on the whole financial asset market rally since 2010. There will be plenty of those out there saying ‘I knew this would all come crashing down’.
As noted midday Wednesday, the dollar rally is now parabolic. The moves across FX were described as “staggering”.
Things have improved in dollar funding markets, but we’re a long way from “normal”. The Fed’s enhanced swap lines were tapped on Tuesday (in Japan) and Wednesday (in Europe), but many observers see scope for the FX swaps market to trade persistently wide.
“The dollar funding needs of both banks and non-banks is what’s at risk and the assets that are being funded are US assets – Treasuries, MBS and credit – so the Fed has a vested interest”, Zoltan Pozsar wrote, in a new note, adding that while the swap lines “are now active… it feels like the operational aspects of it need to be fine-tuned”
Note that we probably shouldn’t wait around too long to get the new commercial paper funding facility fired up and running.
Gold fell more than 2% Wednesday, as everything not tied down is sold indiscriminately to raise cash for margin calls, fund outflows or to stuff inside the literal mattresses on the off chance anyone is still accepting fiat money once the viral apocalypse runs its course.
In a Bloomberg TV interview on Wednesday afternoon, Patrick Harker said the Fed is weighing additional measures to intervene including a term auction facility and/or buying municipal debt. His comments came after Janet Yellen and Ben Bernanke called on the Fed to do more.
After the bell, news broke that the NYSE will temporarily go to fully electronic trading, as New York’s COVID-19 crisis worsens.
For those desperately searching for a silver lining, I’ve got one for you: If you’re having a bad year, don’t sweat it too much. Because you’re in good company…