Are bonds affected by the stock exchange

Coronavirus : What the falling prices of all bonds mean for investors

No stone is left unturned in the bond markets at the moment. The prices of all government bonds in the euro zone are falling massively. With the sales, investors are reacting to the multibillion-dollar aid programs of all the countries concerned, which will lead to significantly higher national debt and a simultaneous sharp decline in economic output. At the same time, many large investors now need liquidity or are now taking with them previously accumulated price gains. "Asset managers sell everything that is still reasonably liquid and not under water," says bond expert Christoph Rieger from Commerzbank. An overview of a market in turmoil.

CORPORATE BONDS

The situation is particularly dire for corporate bonds. While government bonds can still be traded, the market for corporate paper is largely on dry land, traders report. Depending on the company, anyone who holds corporate bonds and wants to turn them into cash can no longer find buyers. For example, Lufthansa bonds are practically unsaleable. "The prices that are displayed on the screens are no longer worth anything," said Friedrich Luithlen, who is responsible for the bond business at DZ Bank, the "Handelsblatt".

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The rating agency Moody’s agrees with the investors. Yesterday she downgraded Lufthansa's debts to “junk”. They are now considered scrap papers - and that has consequences. With a Ba1 rating, Lufthansa bonds are no longer classified as “investment grade”, ie bonds in which funds and other large investors can invest with a reasonable risk.

GOVERNMENT BONDS

In the case of government bonds, new investors are now demanding significantly higher interest rates on their money across the board. The ten-year German government bond, a kind of yardstick for what is happening on the markets, has now returned to a return of minus 0.28 percent. On March 9, it was still minus 0.909 percent. The yields of many bonds from the EuroZone have even turned back into positive territory. France, for example, has to pay 0.40 percent again for a ten-year debt. On March 9, Paris was still in debt for minus 0.45 percent. Investors are also fleeing in droves from Italian government bonds. There is speculation on the market that higher-interest “coronavirus bonds” could soon be issued in order to give aid to clumsy countries in the euro zone. Ifo boss Clemens Fuest also warned of a collapse of confidence in highly indebted countries in the euro zone, with interest rates rising sharply. Here the European Central Bank would have to signal that failures are ruled out.

Rome now has to pay 2.87 percent for fresh money (ten years). At the beginning of March it was only 0.9 percent. The rating agency Moody's further fueled the sell-off by lowering the outlook for the euro zone from “stable” to “negative”.

FOLLOWS FOR INVESTORS

Anyone who has deposited his money in bonds and exchanged it for bonds in the course of the crash on the stock markets will be able to watch rollercoaster rides in the depot. Because at first bonds moved like in a textbook: When the stock markets crash, the prices of bonds rise because investors are looking for security. Especially German, Dutch, American and Finnish government bonds are actually always popular when the stock exchanges got into rough water.

This time, too, it was initially like this: frightened investors put their money in bonds in safety. But this time it was only brief. The price of a ten-year government bond initially rose sharply until March 9, only to have fallen massively since then. For example, the 30-year German government bond with a remaining term until January 2030 has fallen from just under 110 to 102 since March 9, which is a minus of 7.3 percent. Many bond funds are also in the red, often between two and six percent in a weekly comparison. So far, they have resisted the crisis better than equity funds. Here the weekly minus is often around 25 percent.

The ten-year US Treasury bond, which received the most attention worldwide, reacted similarly: While the yield was 1.6 percent in mid-February, it dropped to 0.318 percent by March 9, and has since recovered to 1.08 percent when it fell Courses.

The massive fluctuations have to do with the system of bonds. If many bonds buy and the prices rise, new buyers only receive the fixed interest rate (the coupon) paid out annually at a significantly higher entry price. The profit as measured by the price - the return - therefore decreases. Since all German government bonds, as well as most long-term skiers from the euro zone, especially those with a high credit rating, only yielded negative returns before the corona crisis, the initially massive purchases pushed the returns further into the red. Conversely, the subsequent sales caused yields to climb again significantly. This is currently triggering further sales, as investors are parting with old, lower-yielding securities in anticipation of higher-yielding securities. In addition, liquidity is required everywhere. The rise in yields is even more massive for corporate bonds, especially for smaller companies. The market fears an increasing number of future failures. However, all major central banks around the world are countering this and have announced increased purchases of corporate bonds. There is a very high probability that bonds from large companies and the member states of the EU will not default. Investors who have invested here may now suffer from book losses, but will be reimbursed 100 percent at the end of the term.

THE OUTLOOK

Whether the situation of bond owners could deteriorate further depends above all on the duration of the crisis and rapid countermeasures by central banks and politicians. "The worsening global environment will weigh on growth in the EU member states in 2020, although robust domestic demand, loose monetary policy and some fiscal easing will mitigate the effects," believes Kathrin Muehlbronner, Vice President of Moody’s. However, given the already high debt ratios, many states in the European Union do not have unlimited options for combating crises. Relief for the bond markets could be brought into play by Italy and Germany, for example, jointly secured coronavirus bonds that could be used to finance economic stimulus packages.

WHAT EXPERTS ADVISE

Many asset managers and fund managers advise caution at first. They are currently acting very cautiously and have only bought a few bonds with very short maturities, says Ariel Bezalel, head of strategy for fixed income at asset manager Jupiter. He assumes that even larger, coordinated fiscal policy measures will be necessary to calm the markets down again. The corona virus is an extreme event, a so-called black swan, and has caught a lot of market participants on the wrong foot. The market is currently in the process of re-pricing risks. This will continue.

Deutsche Bank also emphasizes that the uncertainties about the development of the virus pandemic made all forecasts for the near future difficult. A look at China could be helpful here. The country will be the first to show how quickly economies can recover after the virus shock.

However, there are also bonds that have not recorded massive losses in the current coronavirus crisis, but on the contrary have developed positively. These include, above all, the government bonds of a country that has so far been hardest hit by the epidemic: China. Since the beginning of the year, the yields on ten-year Chinese government debt have fallen from 3.17 to 2.76 now, and conversely, prices have risen significantly.

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