Cash is king in a market that has now a suffered declines of more than 30% in major stock market indexes since mid-February, sloppy trading in investment-grade bond funds that were supposed to offset the risks of stocks and 10-year Treasuries yielding about 70% more than they were in early March.
Even gold, which, along with Treasuries often acts as flight-to-safety assets, has lost 7.5% of its value, from recent highs near $1,675 an ounce reached in late February and again in early March.
The Federal Reserve is trying hard to support financial markets and the economy. After announcing $700 billion in asset purchases last week, on Monday morning the Fed opened the spigots. It removed any limits on that revived quantitative easing program, saying it would continue to purchase Treasuries and MBS in “amounts needed to support smooth market functioning and effective transmission of monetary policy” to support financial conditions and the economy.
The Fed also announced Monday it would be buying investment-grade securities in primary and secondary markets and through exchange-traded funds — something it has never done before. In addition, the Fed said it would initiate lending programs for small businesses, consumers and large employers and a term asset-backed loan facility (TALF), which it had used during the financial crisis.
Investors have been reacting to the continued bad economic and market news, favoring cash over all other assets. According to fund flows report from Bank of America, there have been record outflows from investment-grade, TIPS, mortgage-backed and municipal bond funds in the week ended March 18. A total $108.9 billion left bond funds, roughly half ($55.3 billion) from investment-grade bond funds.
Equity funds experienced far fewer withdrawals, $20.7 billion, but that total included a record one-day outflow on the previous Friday, of $20.2 billion. Gold funds saw outflows of $2.5 billion. Almost $96 billion flowed into cash or money market funds.
Clearly money market funds have become the preferred flight-to-safety asset for investors, many of whom are reportedly selling bonds to raise cash rather than equities, which have fallen even more in value.
One dramatic measure of the growing popularity of money market funds: three- and six-month Treasury bill rates fell below zero on Friday, to -3 basis points and -2 basis points, respectively.
Demand is so strong for cash that some institutional investors are willing to pay a small price to own it, says Kathy Jones, chief fixed income strategist for the Schwab Center for Financial Research. “There is no place to hide other than cash, which is considered safe with low volatility.”
Jones is not suggesting, however, that investors unload more bonds now — “we’ve gone a long way to price in a lot of bad things” — but suggests they start looking around for securities to purchase if they have a long time horizon and have some confidence in the creditworthiness of an issuer.
That could be a tall order now. Over the weekend, St. Louis Fed President James Bullard told Bloomberg News that U.S. GDP could decline by 50% in the second quarter with the unemployment rate reaching 30%, and Morgan Stanley economists forecast a 30% drop in second-quarter GDP.
Days earlier, Goldman Sachs forecast a 24% decline in second-quarter U.S. GDP and JPMorgan a 14% drop.
“We are already in a global recession,” tweeted Mohamed A. El-Erian, the chief economic advisor at Allianz. “We can/must avoid a depression.”
The Fed’s Bullard suggested a huge stimulus by the federal government to make up for a $2.5 trillion loss in income that is expected during the current downturn and said the Fed is ready to do more to stabilize markets — “everything is on the table.”
Congress is working on a $2 trillion stimulus package that would include direct cash payments to American households and billions to support businesses. Negotiations hit a snag Sunday because Democrats want tougher restrictions on businesses that would receive support from the $500 billion allocated for business loans, loan guarantees and investments as well as more protection for workers and aid to hospitals, state and local governments.
A procedural vote to advance the bill failed 47-47. Also complicating the vote is the fact that at least five Republican senators are not able to vote on the Senate floor, which is required for Senate votes, because they are in self-quarantine, including Sen. Rand Paul, R-Ky., who has tested positive for COVID-19.
“Congress needs to approve additional funds today so that we can move forward and support American workers and the American economy,” Treasury Secretary Steven Mnuchin said Monday morning in an interview on “Mad Money With Jim Cramer.”
President Donald Trump, at a news conference Sunday evening, would not commit to saying he would not accept federal relief money for The Trump Organization.
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