In a crisis, it is said, all correlations go to one. Threats get so overwhelming that everyting reacts in unison. And the common thread running through all facets of financial markets and the real economy right now is simple: a global cash crunch of epic proportions.
Here are the signs that the world is focused on liquidity above all else.
Dash to Cash
Investors piled $137 billion into cash-like assets in the five days ending March 11, according to a Bank of America report citing EPFR Global data. Its monthly fund manager survey showed the fourth-largest monthly jump in allocations to cash ever, from 4% to 5.1%.
“Cash has become the king as the short-term government funds have had massive deposits, with ~$13 billion inflows last week (a 10-standard deviation move),” adds Maneesh Dehspande, head of equity derivatives strategy at Barclays.
A desire for liquidity means long and short positions alike are being closed, according to the most recent commitment of traders report from the CFTC.
“In aggregate, the market saw a large outflow, with $9 billion of long liquidation and $6 billion of short covering,” said Michael Haigh, global head of commodity research at Societe Generale. “This general and non-directional closure of money manager positions could be explained by a need for cash to pay margin calls on other derivatives contracts.”
Trim Those Hedges
This means that for multi-asset investors, the assets the normally offer respite from a market storm have failed to do so. With the S&P 500 down more than 12% in the five sessions ending March 17, the Japanese yen is weaker against the greenback, the 10-year Treasury future is down, and gold is too.
That’s another sign dollars are top of mind, and investors are selling not only what they want to, but also what they have to.
Corporate America is tapping its rainy-day fund to raise cash.
Companies that are drawing on their revolving credit facilities include Boeing Co, Kraft Heinz, Wynn Resorts Ltd., Hilton Worldwide Holdings Inc., as well as Caesars Entertainment Corp. and MGM Resorts International.
Private equity behemoths Blackstone Group Inc. and Carlyle Group Inc. are urging their portfolio companies to do the same.
Hitting Pause on Bank Buybacks
The presumptive need for liquidity going forward as companies tap their credit lines has prompted major financial institutions to put off plans to buy back their own shares.
A statement from the Financial Services Forum indicated this decision was made to “provide maximum support to individuals, small businesses, and the broader economy.”
A combination of slowing profit growth and the discretionary pausing of share repurchases threatens the sole source of net inflows into U.S. equities over the past decade.
Pricey Commercial Paper
Another way to see how cash is so prized is looking at how expensive it’s become to get access to one of its close cousins – short term IOUs. 30-day commercial paper rates have spiked, eliciting the re-instatement of a Federal Reserve 2008-era facility to try to calm this corner of the funding markets.
Fiscal Booster Shot of Bucks
Politicians of all stripes are coalescing around a solution to combat the stresses on American households: money.
“Americans need cash now, and the president wants to give cash now,” said Treasury Secretary Steven Mnuchin at a press conference on Tuesday. “And I mean now, in the next two weeks.”
New Jersey Democratic Senator Cory Booker has also called for “immediate cash payments of $2,000 to every income-eligible American.”
It’s one thing to see exchange-traded products stuffed full of relatively illiquid corporate bonds trade below the purported sum of the value of their holdings. It’s quite another to see such a massive discount develop in a more plain-vanilla product like the Vanguard Total Bond Market ETF (BND) as investors ditched the product to raise cash despite not quite getting their money’s worth.
The fund closed Tuesday at a discount of nearly 2% to its net asset value, which blew out to above 6% last week amid accelerating, record outflows. That exceeded its prior record discount from 2008.
“In the very front end of IG corporate bond market as spread curves are inverted,” writes BofA Securities head of U.S. high grade credit strategy Hans Mikkelsen. “While normally spread curves invert due to credit risk, this time it is a liquidity story as investors raise cash and money market and other funds de-risk as they expect large withdrawals given the partial shutdown of the global economy.”
— With assistance by Cecile Gutscher, and Sid Verma
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