Market Update - Coronavirus (April 10th)

Yesterday, the benchmark S&P 500 index closed at 2,789.92, up 24.7% from its March 23rd low. It is still down -17.3% from its February high.

Prices of other financial assets have also strengthened. See below the recent tightening in the credit spread (the difference in yield between a corporate and the equivalent government bond) of Baa/BBB bonds. Bond yields are inversely-related to their price – so tighter yield spreads reflect a higher bond price.

Moody’s Baa Corporate Bond Yield Relative to Yield on 10-Year Treasury

Financial markets have rebounded recently on a combination of aggressive central bank measures to support the financial system and increased hopes that government action to contain the spread of Coronavirus is proving effective. Most recently, the US Federal Reserve announced details of $2.3 trillion in programs to support the US economy and financial markets. The plan includes both lending programs to businesses, municipalities and states, and mechanisms to support financial asset prices through direct purchases of corporate bonds, both investment-grade and, for the first time, high-yield bonds as well. On the Coronavirus front, following the stabilization in the spread of the virus in China, Italy and Spain, it is possible that we are now seeing signs of moderation in the US as well, where the number of daily new cases is no longer rising (see chart below). This is very important as at nearly 470,000 cases of infection, the US has by far the largest number of infections globally (in fact, New York State alone, with 161,500 cases, has more reported infections than any single country outside the US). Finally, given progress made in many countries on virus containment, there is increasing talk about exit strategies from the lockdowns currently in place – enhancing hopes that the economy could restart gradually sometime soon.

I wish you a quiet weekend, stay safe,

Eran Peleg