Global markets were panicked and investors rushed to seek safe havens With the escalation of the Corona pandemic that sweeps the world from north to south and east to west, however, the behavior of investors in choosing safe havens differed from its counterpart in times of turmoil in the markets from time to time.
In a research note issued by the International Finance Institute to assess the trends of investors in the midst of the current crisis, the Institute concluded that investors are rushing to seek liquidity, which led to a record rise in liquidity markets.
The memo said, “With the turmoil hitting the markets to levels that we did not know since the global financial crisis and incentive packages from governments around the world to face the pandemic of the emerging Corona virus, the investor scramble for safe assets led to liquidity assets in the US markets reaching $ 3.8 trillion not far from the record level. Recorded during the global financial crisis in 2009 around levels of $ 3.9 trillion“.
In times of crisis, investors rush to the US dollar, which is one of the safe havens in times of crisis, as the green currency constitutes the bulk of foreign reserves for all central banks around the world.
And the research paper continued, “This scramble for cache reduced the levels of liquidity in the assets that take place in the risks in the markets with a state of uncertainty about the future outlook for investment returns in those instruments.”“.
The stimulus packages that central banks pumped into the markets led to an increase in the return on long-term bonds, which eventually led to a sharp decline in the size of negative-yielding bonds, which fell to levels of 8.7 trillion dollars at the end of last week, compared with about 15 trillion dollars about a week ago.
Selling wave of corporate bonds
Concerns over defaulting on debt and outstanding bonds have led to a sell-off in corporate bonds specifically over the past few weeks..
IFC data indicate that investors have withdrawn about $ 43 billion in corporate bonds since February 20, with the cost of insuring the companies ’debt rising to record levels..
The amount of bonds due during 2020 is about 1.8 trillion dollars, the largest part of which is concentrated inside the United States at about 450 billion dollars, and in Germany about 250 billion dollars..
The gravity of the situation for companies does not stop there, as the research paper issued by the International Finance Institute indicates that an imminent reduction of the credit rating will curb the demand for the bonds of those companies..
The Institute said, “While it is still too early to assess the expected economic effects of the emerging corona virus, this year will see a downgrade of the credit rating of many companies suffering in one way or another from the consequences of the crisis with indicators of a recession in the global economy.”“.
Earlier last week, Reuters quoted analysts at Moody’s credit ratings agency as saying that the agency was in the process of issuing the first mass wave of ratings cuts for companies affected by the crisis in the next few days..
Scramble for the US dollar
In the midst of the crisis in the global markets, the demand for the US dollar has risen sharply, and the institute said that the dollar swap lines used by the American Fed may have eased some funding pressures on investors in the euro area, but the high demand led to pressures in emerging markets and specifically on the currencies of those markets.
He added: “Debt denominated in US dollars in emerging markets is at record levels of $ 5.8 trillion. The continued appreciation of the dollar will represent financing burdens and risks for sovereign and corporate bonds in those markets that suffer specifically from a decline in their dollar reserves.”“.
The institute also warned that some sectors that traditionally enjoy protection from natural hedges, such as commodity revenues such as oil, are under pressure from the strength of the US dollar.