Liquidity challenges in the bond market have become another component of the current crisis, adding to existing investor concerns about the economic impact of the coronavirus outbreak and the plunge in oil prices. Taking the temperature of the market, we think fixed income remains in the thick of the crisis, but policymakers have escalated their response and we are beginning to see signs of improvement in liquidity.
To fully stabilize the bond markets, we think the US Federal Reserve (Fed) and other central banks will ultimately need to do much more balance sheet expansion. We also expect fiscal policy to begin taking a much larger role in the policy response, and will be closely watching the interaction between central banks and fiscal policy to gauge the outlook for economic growth and inflation.
The corporate credit markets are at the center of this interaction as valuations will be influenced by central bank policies focused on bond market liquidity as well as fiscal policies focused on the economy. We see potential value in areas of the fixed income market that are most likely to benefit from policy responses but we are being patient and clinical in evaluating risks and opportunities in this uncertain environment.
On March 18, senior members of GSAM’s Global Fixed Income team discussed recent developments in the bond market and the policy response. Here are the key takeaways: