Bond Markets on Red Alert for Policy Action After Historic Week

Bond investors will be on high alert for more action from policy makers next week, after emergency rate cuts and promises of cash following some of the most turbulent market moves in history.

The European Central Bank, Bank of England and Norges Bank have all pledged to do more to bolster confidence after the rapid spread of the coronavirus has led to lockdowns across countries and meltdowns across markets.

“Further liquidity injections are absolutely essential if we are to avoid the ongoing economic downturn descending into a potential financial crisis,” said Mike Riddell, a money manager at Allianz Global Investors. “The most important immediate concern is to get the U.S. Treasury market under control.”

Money markets are pricing in nearly 100 basis points of cuts from the Federal Reserve on Wednesday, a hefty move that would take its lower bound rate to zero. Compared to that, Europe’s policy makers have little room to manoeuvre and investors may be witnessing the passing of the baton to governments.

Germany’s pledge of as much as 550 billion euros ($610 billion) in “bazooka” spending led to the biggest sell-off in a decade of the nation’s haven debt Friday, just a day after the largest collapse in Italy’s bond history. That was sparked by the ECB’s President Christine Lagarde indicating it wasn’t willing to bail out markets.

For investors, it marked the clearest sign yet that the central banks can’t do much more in the way of stimulus. Instead it will have to be governments that pick up the fight against the effect of the pandemic on the real economy.

“Lagarde tried that and failed, and then the others in the ECB have rushed to clarify the ECB remains in control,” said Jan von Gerich, chief strategist at Nordea Bank Abp, who sees a period of higher yields in Europe. “But it certainly seems the governments are ready to do their part.”

Next week sees little letup in the schedule. Group-of-Seven leaders will hold an extraordinary summit by videoconference Monday, while U.S. President Donald Trump is under pressure for further action. The U.K., Italy and Switzerland have all pledged billions in spending, while the Bank of Japan will meet Thursday after pouring trillions of yen into markets.

What Bloomberg Intelligence Says

“There is a massive flight to cash with volatility having rarely been so expensive and the lack of liquidity killing markets. A Fed QE bazooka and global fiscal action is on the cards to fight off a global recession. Markets will remain highly volatile but indiscriminate selling sees opportunities emerging for medium-term investors.”

— Tanvir Sandhu, Chief Global Derivatives Strategist

What to watch:

  • March 17: German ZEW survey expectations for March, est. -26.4, prior 8.7
  • March 17: ECB’s Rehn in Finnish parliament
  • March 18: Final euro area CPI reading for February, est. 1.2%
  • March 18: Federal Reserve decision
  • March 19 Bank of Japan decision

Bond sales:

  • March 17: U.K. to sell GBP2b 1.75% 2049 bonds
  • March 18: Finland to sell up to EU1b 0% 2024 bonds
  • March 19: Spain to sell 0% 2023, 2.35% 2033 and 1.5% 2027
  • March 19: France to sell 0.7% I/L 2030 and 0.1% I/L 2028

— With assistance by William Shaw

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