A year like no other
The year began rather quietly. Economic data releases around the world in January were solid if unspectacular. There was much talk of recession in the US over the holiday period but there was no real evidence in the data or from company reports. In the UK, a mini housing boom was developing, following Boris Johnson’s stunning electoral victory and the successful passage of the Brexit Withdrawal Agreement. Chinese economic data were solid and even Europe seemed to be growing steadily. Despite worrying tensions between the US and China, markets were relatively calm.
Then the virus struck. As it swept across the globe, large swathes of the economy were closed down by government diktat. Numbers of new cases and fatalities from the virus led the national news in just about every country. Stock markets tumbled. Policymakers, with memories of the global financial crisis fresh in their minds, took actions that were big, bold and decisive. Never before has such massive economic stimulus been delivered so quickly. Huge increases in government spending, tax cuts and loan guarantees were combined with central bank intervention that went far beyond the traditional boundaries.
By comparison, bond markets appear to have been havens of stability, in terms of the year-to-date returns shown in the chart. Yet they had their own excitement. The corporate bond market came close to collapse in March, saved by a huge effort on the part of the Federal Reserve. Our portfolio managers commented that there were few bids on the way down and few offers on the way up. Yet new issuance this year has broken records. Even the US Treasury market, the most liquid bond market in the world, went into convulsion in March with yields at the very long end of the curve gyrating violently. The world’s biggest buyers of government bonds have been central banks, turning conventional views of financial stability on their heads.