InvestNow News – 15th May – Russell Investments – Transitioning fixed income assets in fractured markets
9 May 2020 – Travis Bagley
The coronavirus pandemic has roiled the global financial markets, with investors struggling to forecast the economic impact of an unprecedented global health crisis. The uncertainty is causing equity returns to fluctuate by triple digit basis points, while the fixed income market is heavily impacted by fragmented liquidity and higher trading costs. Trading fixed income assets since the onset of the pandemic in early 2020 has many similarities to the environment we faced during the credit crisis that began in 2007. Liquidity has become harder to find, risks have multiplied and spread costs are significantly higher than they were just a few months ago. To navigate our clients through the challenging times we face today, Russell Investments has revisited our approach to transitioning fixed income assets during the 2007 credit crisis.
How the credit crisis impacted fixed income transitions
In mid-2007, the fixed income markets were thrown into turmoil by the developing credit crisis. While government bonds remained relatively liquid (and much sought-after by investors seeking safety), all other types of bonds encountered tougher trading circumstances. Structured bonds were especially hard hit, not only those related to home equity, but also commercial mortgage-backed securities and other asset-backed securities. Bid-ask spreads expanded, and trading volumes plummeted, as distressed sellers continued to apply selling pressure, creating a downward spiral in credit conditions.
Although the market circumstances in the late 2000s were uniquely different than those during the coronavirus pandemic, we have learned from the past and from our experience in navigating transitions during stressed markets. We have seen the uncertainty surrounding the pandemic and its potentially long-lasting impact on the global economy to widen spreads on even the most liquid Treasuries, and dealers are taking risk off their balance sheets. Russell Investments recommends diligent pre-transition analysis, sourcing liquidity across numerous venues, and taking a patient and structured approach to managing costs and risks in fixed income transitions.