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4.03.2020 20

Coronavirus emergency: Fed cuts rates, but markets expect more

Published March 4, 2020

< 5 minutes

< 5 minutes

The essential


  • The cut and the market reaction: In the first intra-meeting ease since the 2008 crisis, the Fed delivered a 50 basis-point rate cut. Market volatility and liquidity concerns have likely been the trigger for the emergency cut. The market reaction has been a sell-off in equities, while the 10-year Treasury yield touched new lows, as the Fed move is perceived as not being enough to offset recent deterioration in financial conditions due to the market reaction to the coronavirus outbreak. Markets still expect more.
  • Investment convictions on US fixed income: Selectively, corporate credit appears increasingly attractive, and we continue to prefer securitised bonds. While we have a cautious stance on US duration, 30-year treasuries look attractive relative to 10s. Volatility in corporate credit has disproportionately widened spreads in certain sectors and securities. There are opportunities in companies that remain fundamentally strong, with reasonable leverage and liquidity, strong free cash flow, not capital intensive or too dependent on oil prices.
  • Views on the other main Central Banks: The other main Central Banks have less room to act, but they will be pressured to follow the easing path to support market conditions and mitigate possible volatility in the currency markets. Concerning the ECB, a further rate cut remains an option, but it looks less effective than other measures in terms of monetary stimulus transmission. On BoJ, we expect more liquidity to be injected into the system, and we keep our previous expectations for 10 bps rate cut in the next 12 months. Regarding the BoE, in our view the probability of a rate cut has materially increased.

 

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