Morning Commentary: High-grade primary market shuts as stocks plunge, Treasuries rally

By Cristal Cody

Tupelo, Miss., March 16 – High-grade issuers stood back early Monday as the financial markets nose-dived following the Federal Reserve’s Sunday emergency rate cut of 100 basis points in response to the coronavirus’ threat to the economy.

Panic selling triggered a circuit breaker that caused trading to stop for 15 minutes at the start of the session.

By mid-morning, the S&P 500 was down 7.51%. The Dow Jones industrial average fell 7.95%, or 1,842.74 points.

Treasuries resumed last week’s rally after closing Friday lower. The benchmark 10-year yield declined 13.5 bps to 0.813% over the morning.

The Federal Reserve took the measure to implement its second emergency rate cut this month before its scheduled meeting that was expected to start Tuesday after the stock market entered bear territory last week. The move lowered the Federal Funds target range to 0% to 0.25%.

Over the weekend, panic buying emptied the nation’s supermarkets of some basic goods as many Americans prepare to hunker down to stop the virus’ spread.

Church services are widely cancelled, and many schools across the country are closed for extended spring breaks.

In addition to the rate cut, the Fed plans to begin purchasing Treasuries again in a quantitative easing program that was conducted after the 2008 financial crisis. The QE program will include $500 billion in Treasuries and $200 billion in agency mortgage-backed securities.

Tone had improved enough on Friday that three issuers tapped the high-grade bond market, bringing the week’s volume to just over $7 billion.

This week, anywhere from zero to up to $60 billion of bond issuance is expected, market sources report.

High-grade credit spreads ended Friday more than 35 bps wider on the week.

In the secondary market, high-grade paper was mostly weaker early Monday.

Goldman Sachs Group Inc.’s 2.6% senior notes due Feb. 7, 2030 (A3/BBB+/A) traded at 95.21, down from 96.57 on Friday and a 101 handle in the same period a week ago, according to a market source.

Goldman Sachs sold $2 billion of the notes on Feb. 5 at 99.96 to yield 2.06% and a spread of Treasuries plus 95 bps.

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