Fixed Income Market Reaction to Equity Market Selloff
By Paul Daley, Managing Director, BondWave
With concern about the impact to economic activity of the COVID-19 virus being blamed for the recent steep selloff in equities, we are also seeing an impact on the cost of trading liquid, investment grade corporate bonds. The BondWave Benchmark Data and Trading Indices includes two corporate bond bid-offer spread indices. The BondWave Bid-Offer Spread Service (BOSS) measures the width of the bid-offer spread in the dealer-to-dealer market for A and BBB rated corporate bonds as well as the bid-offer spread in the dealer-to-dealer market for AA and A municipal bonds.
Corporate Bond Liquidity Cost Rising
Corporate bond bid-offer spreads continue to rise. With the selloff in equities on Monday the cost of liquidity in corporate bonds also reacted sharply. The BOSS 1 to 5 Year Corporate Index hit 1.22% on 3/9/2020 while the BOSS 5 to 10 Year Corporate Index hit 1.42%. However, there is measurement bias at work in the data too. The companies most likely to be impacted by a COVID-19 drag on economic activity are also the most likely to trade. This can cause widening of the average bid-offer spread that is greater than the actual average as bonds that are less impacted are also less represented in the data.
Municipal Bonds Begin to React
Municipal bond bid-offer spreads moved above their historic average on Monday while remaining in their historic range.