Bond Market Volatility and Monumental Monetary Policy

Bond Market Volatility and Monumental Monetary Policy: Our Experts Weigh In

Keeping up with the coronavirus crisis’ impacts on the stock and bond markets as well as the reactions from federal and local government policymakers can feel like a full-time job. For us, it is. What does it all mean for your portfolio in the days ahead? In our latest episode of an ongoing series of special updates, Director of Research Jeff DeMaso and Portfolio Manager Steve Johnson sat down together (remotely) to discuss the bond market, the Federal Reserve, Congressional relief efforts and what they expect to see in upcoming economic data releases.  The following is a transcript of their wide-ranging conversation. To listen to the podcast in its entirety, please click here.

Jeff DeMaso:
All right, Steve, it has been one week since [Chairman] Dan [Wiener] and [Chief Investment Officer] Jim [Lowell] recorded a podcast; and, well, a lot has happened since then. The virus has spread extremely fast. For example, just in New York City here a week ago, there were 2,000 confirmed cases. As of last night, the number is over 15,000. And it’s not just the spread of COVID-19, but it’s the response to it, which is moving extremely quickly. I mean the Fed has gone from being pretty much on hold to full-blown crisis management mode in a matter of few weeks, which we’ll talk about in just a minute.

I don’t know about you, but at least for me, time’s moving both extremely fast and slowly. Each day seems to zip by, but each week feels like a month or so.

Steve Johnson:
Without a doubt, and I’m definitely grayer than I was two weeks ago.

Jeff DeMaso:
Yeah, I mean, not only are things moving quickly, but the magnitude of the moves is what kind of jumps out to me. We’ve seen some large record moves in the market and I think it’s those two factors—just the speed and the magnitude—that sets this environment apart from past ones, [making] it feel unnerving, and probably contributing to the graying that you’re experiencing there.

Let me offer one fun fact though. Since last week, at least as of last night’s close, and I suppose given the speed of things, I should say that we’re recording this on Wednesday morning [ed. note: March 25], but with yesterday’s rally, stocks are actually higher than they were last Wednesday. Most people don’t realize that.

If we can try and flip our mindset on stocks and bonds, and think about them being on sale as opposed to being at a loss, that might help us think about getting through this difficult period.

Steve Johnson:

That’s a pretty amazing statistic, especially with the speed in which these markets are moving.

Jeff DeMaso:
Today, I thought we could kind of maybe recap some of the major items from the past week. In particular, I want to talk about the bond market and the Fed, and then maybe let’s try and cast our eye ahead, if we can, and talk about some of the economic data coming down the pike because that’s going to be pretty shocking to people I think coming down as soon as tomorrow morning with initial jobless claims.

But let’s start with the bond market. I thought bonds were supposed to be safe, but we’ve seen some real turmoil in the bond market with some funds showing some pretty shocking losses, and even high-quality corporate bonds have sold off a bunch. What’s going on in the bond market? How should we be thinking about bonds? And maybe talk a bit about the Fed in there as well.

Steve Johnson:
I think the bond market is really what moved the Fed to act. As you mentioned, we saw really some major dislocations, and what I mean by dislocations is really seeing prices widen out by huge amounts last week. And so as you mentioned, we saw some bond funds suffer some very large losses, and there was really fear that the bond market was getting away from the Fed. And by that, we mean they weren’t acting in a rational manner. And as an investor, we own bonds to stabilize the portfolio and to act as a cushion. And with that cushion being removed it seemed there was some real panic.

Thankfully, the Fed came to the rescue. And what we’ve seen is the Fed’s new mantra I think, Jeff, is “whatever it takes.” They have expanded their bond-buying program. In essence, they’ve created multiple programs, expanding it to the corporate bond market, not only to Treasurys but to the corporate bond market. And so what that has done has really stabilized prices over the last couple of days and has given us a shot of stability that was badly needed.

What investors need to realize is that the Fed has been there before. We’ve seen, obviously in 2008, we were somewhat slower to react. But because of that lesson, the Fed has really stepped up to the plate here. And what they have done with their program, in essence now with $4 trillion worth of ammunition, has been able to stabilize the bond market and really create a sense of calm out there that didn’t exist last week.

Now, we’re starting to see the bond market behave better, corporate bonds, municipal bonds. That is very reassuring for me as well as it should be for investors.

Jeff DeMaso:
I completely agree. The Fed really stepped up as that buyer of last resort, do whatever it takes to keep the markets functioning and to keep the plumbing working, so to speak.

The flip side of those stresses in the market and seeing bond prices fall is that it creates opportunity. The valuations or the level of yield that you’re picking up from corporate bonds now is looking historically pretty attractive. Things could always get a little bit worse from here, but we’re seeing some opportunities in markets. And in talking to portfolio managers, they’re starting to see some opportunities as well in the credit markets.

And I think to your point, the Fed stepping in and getting things working again wins some comfort to be able to take advantage of those opportunities.

What that has required is really an overwhelming response, and we saw that over the weekend by the Fed. Now, we’re seeing it with Congress.

Steve Johnson:
Without a doubt. To ensure that the plumbing is working, just like at your house, just provides a sense of stability and calm that we needed.

With the bond market being stabilized in the Fed, Jeff, I want to turn it to you a little bit and to talk about the economy. What are we going to see here in upcoming weeks in terms of data? And what should we be prepared for?

Jeff DeMaso:
Well, to use a technical term, we should be prepared for some “pretty awful” economic data. The estimates I’m seeing are all over the place. But seeing second-quarter GDP declining at annual paces of 9%, 10%, 20%. Even this morning, I saw one at 40%. Those are some pretty shocking numbers, and I get it because typically in a recession people go out less. But right now, they’re largely not even going out at all.

One thing that stands out to me is compared to last year, we saw manufacturing come under pressure from the trade war and tariffs, and it was the service side of the economy that carried us through and contributed to most of the growth. And the service sector is a lot larger than the manufacturing side of our economy today. The data’s just starting to come in, but the early signs are that the service sectors is what’s getting [hit] hard. One measure of activity fell to 39.1, the prior lowest read on record was 49.3. And again, that kind of makes sense. Big cities here in New York, where I am, we’ve shut down all non-essential services, right? So restaurants, bars, movies, theater, sporting events, kind of the service sectors have really come down.

And I think what we need to really be prepared for and is going to be a test of how bad these numbers are going to be and also how we’re going to respond to them is tomorrow’s initial jobless claims, that’s the number of people who are applying for unemployment because they were laid off. To use another technical term, I think it’s going to be “ugly.”

Again, I’m seeing estimates that it could top a million in claims and some estimates I’ve seen for 2.5 million, and that is a shocking number. [Note: Jobless claims leaped up to a record-high 3.3 million in the March 26 report.] That is a lot of people who were working just a week ago, just three weeks ago, who are suddenly out of a job. Again, the speed and magnitude of this is what really stands out.

I think it’s very easy at this point to get stuck in a bit of a negative spiral. But two notes on that are just, one, not every company is firing people. You’ve got some like Amazon and Walmart which are hiring to meet the demand that they are seeing. And then even bigger picture is just the numbers are going to be bad, absolutely. And earnings numbers are going to be bad, but we will get through this. Not every company is going out of business.

That leads to, I want to tip it to you, Steve, if I missed something on the economy, fill in that hole and that gap. But maybe talk a bit about the stimulus bill. It sounds like it’s not a done deal yet, but the Senate and at least the White House have agreed preliminarily to a deal. And while we said the Fed has done a lot, it’s kind of time for Congress to step up and try and provide some support through this sharp decline here.

Steve Johnson:
Without a doubt, and it seems like, gosh, we’ve been sitting around waiting for Congress to do something. I know since Sunday night when we were having meetings and talking about it, and it appears that we have the framework for a deal, which is very important because now people are throwing out numbers like $6 trillion and we want to make sure that we’re accurate. The real bill here is about a $2-trillion stimulus bill. The other $4 trillion is, as we talked about, what the Fed now has the ability to use with their different programs.

But what we are seeing is American families are going to get checks [if the bill passes unaltered], so $1,200 per each adult, $500 for each child. We are going to see unemployment insurance be expanded. We are going to see loans to businesses, over $350 billion. Another $500 billion for those industries that have been most impacted. We’re also seeing aid to cities and states as well as direct aid to hospitals.

Here we are seeing, and I think to your earlier point, the extent of this crisis has been dramatic and the speed in which it occurred has been dramatic. And so what that has required is really an overwhelming response, and we saw that over the weekend by the Fed. Now, we’re seeing it with Congress. And the question is the timing and how long this virus will remain.

And in the meantime, we’re seeing this… I wouldn’t even call it “stimulus,” I’d say it’s “relief,” directly to the consumer and to businesses to hold us over while the virus takes its cure and we start to see the economy recover. And I think that is the most important piece. Now that we have the Fed in place and Congress acting, now I think we can feel a little bit more comfortable about the economy hopefully starting to stabilize over the weeks and months to come.

Jeff DeMaso:
I really liked that idea of calling it relief over stimulus, it’s really trying to expand that safety net under families and companies that are going to need it through this period.

So always try to bring it back to the portfolios and investing. Steve, you’re a portfolio manager, what are you doing in this environment? There’s a pretty high degree of uncertainty. The range of outcomes seems really wide. How are you thinking about approaching the markets?

…It’s allowing us to upgrade the portfolio, to look at names that perhaps we would never [have] been able to own before, now put them in the portfolio and really take the opportunity to enhance the quality…

Steve Johnson:
We’re taking a look at each company that we own in the portfolio. And as a dividend-growth manager, what we’re looking for are those companies that are not only going to be able to survive but keep paying their dividend or even increasing it over the next year. And so as we’ve seen over the last couple of weeks, there have been a number of announcements from companies that have been forced to suspend their dividend.

What it’s forcing us to do is to really take a look at our portfolio, maybe look at companies that we thought were too expensive to own before that have now come back in a range that makes them attractive. And so it’s allowing us to upgrade the portfolio, to look at names that perhaps we would never [have] been able to own before, now put them in the portfolio and really take the opportunity to enhance the quality of our portfolio for the next months and years to come.

Jeff DeMaso:
I completely agree. I’ve been talking to the portfolio managers on the mutual funds that we own on clients’ behalf and in our own portfolios as well, and hearing from a lot of other managers in the industry. And that’s kind of a common refrain I’m hearing, looking for an opportunity to increase the quality of the portfolio with the idea that at the end of a crisis and coming out of them, that strong companies get stronger. They get to take more market share. There are fewer competitors.

Let’s maybe try and wrap up here. As I said at the start, it’s the speed and the magnitude that sets this current environment apart from past experiences. And I completely understand that the future road looks bumpy right now, if people are even willing to look at all ahead to the road. But we do know that every bear market comes to an end. Not every company’s going to go bankrupt and that companies and society are going to emerge stronger from this.

And right now stocks and bonds are arguably on sale. Prices could certainly get cut further. But stocks and bonds are kind of this funny asset where when they go lower in prices, investors seem to want to do less with them. Whereas usually when things go on sale, everybody rushes to buy. Maybe if we can try and flip our mindset on stocks and bonds, and think about them being on sale as opposed to being at a loss that might help us think about getting through this difficult period.

Steve Johnson:
I think you’re exactly on point here. As you know, we send each other so many different articles and pieces of research. And one last night that I read that struck me, it said, “The bottom is the day before the recovery begins and it’s impossible to know when that bottom has been reached ever.”

I remember being in ’08, ’09 and when the market turned around, no one really had a good reason why it did, but it did. And so it’s impossible for us to predict the bottom. There’s no way for us to say when the bottom is at hand. However, we can say, as you just alluded to, the conditions that make bargains available certainly are materializing. And so we’ve been going through the portfolios, taking a look where we can now really create some opportunity for investors, where we can upgrade the portfolio, and a year from now be in a better position.

Jeff DeMaso:
Well said, Steve. Thanks for joining me today.

This has been Jeff DeMaso and Steve Johnson from Adviser Investments. Thank you for listening to The Adviser You Can Talk To Podcast. If you enjoyed this conversation, please subscribe to and review our show. You can check us out at Your feedback really is always welcome. If you have any questions or topics you’d like us to explore, please email us at Thank you for listening and stay safe.

This is a transcript of a podcast released on March 25, 2020. This transcript is for informational purposes only. It is not intended as financial, legal, tax or insurance advice even though these topics may be discussed. Information and events addressed in this podcast, as well as the job titles, job functions and employment of the podcast’s participants with respect to Adviser Investments, LLC may have changed since this podcast was released. For more information on each individual featured in this podcast, see the Our People section of our website.

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