Monthly Review : March 2020

Monthly Review : March 2020


United States

US jobless claims surged to a record 3.3 million in the week ending 21 March as residents in many of the country’s most populous states were ordered to stay at home to slow the spread of Covid-19.  The previous record high was 695,000 in October 1982.  The data does not include those unable to apply for unemployment insurance benefit or workers put on reduced hours, rather than being laid off.  The staggering number no doubt pushed Congress to agree to a USD 2.2 trillion stimulus package, which includes cheques of up to USD 1,200 sent directly to individuals and a USD 450 bailout fund for businesses, states and cities.

Euro area

A group of nine countries, including France, Italy and Spain, wrote a letter to European Council president Charles Michel to request a pan-European debt instrument, or “Coronabonds”, to share some of the fiscal costs arising from the pandemic and reconstruction following the inevitable deep recession.  However, the concept of mutualised debt issuance was again rejected by others members, including Germany and the Netherlands, at the Eurogroup summit, who prefer to use the EUR 500 billion European Stability Mechanism to provide loans to member states with conditions attached.

United Kingdom

The UK government pledged GBP 65 billion of public funds to tackle the coronavirus pandemic, including paying up to 80 per cent of wages where jobs are at risk, support for the self-employed and business rate relief and grants.  The stimulus, which represents around 3 per cent of GDP, will push public finances deeply into the red this year following Chancellor Rishi Sunak’s pro-growth budget earlier in the month.  The Institute for Fiscal Studies warn the economic contraction and higher spending could result in a deficit of more than GBP 200 billion this year.


The KOF Economic Barometer plunged to a five year low of 92.9 in March and the research institute warned it will likely contract to levels last seen during the 2008/09 financial crisis when it hit 60. The export-led economy is vulnerable to demand shocks and disrupted supply chains.  Cultural events have been cancelled and access to bars and restaurants limited.  The government unveiled a CHF 10 billion emergency aid package, including CHF 8 billion for the “Kurzarbeit” programme under which companies can apply for funds to avoid laying off staff. 

Central banks:

Federal Reserve (next meeting: April 29th)

The Federal Reserve threw the kitchen sink at supporting the US economy through the pandemic.  It undertook two emergency rate cuts, a half percentage point on 3 March followed by a full point on 15 March, to bring its policy rate down to near zero, a level not seen since 2015.  Measured increases in quantitative easing were also eventually superseded by a pledge to buy unlimited amounts of Treasuries and mortgage-backed securities.  It also announced two new facilities to buy corporate bonds in the primary and secondary markets, including US listed ETFs which track investment grade credit indices.

European Central Bank (next meeting: April 30th)

The European Central Bank was in damage control mode after Christine Lagarde’s comment that it is “not here to close spreads” between Germany’s and other Eurozone states’ cost of borrowing triggered the biggest ever one day spike in 10-year Italian government bond yields.  A week after her slip up at the 12 March press conference, the ECB launched a EUR 750 billion bond programme to limit the fallout from the health crisis and removed any limits on how much of a country’s bonds it can buy in the Pandemic Emergency Purchase Programme.  The spread between Bunds and Italian BTPs subsequently narrowed.

Bank of England (next meeting: May 7th)

Mark Carney, the former governor of the Bank of England, oversaw an emergency half a percentage point rate cut on 11 March, just days before the end of his near 7-year term in charge.  At the same time the BoE also announced a new term funding scheme to support SMEs and reset banks’ countercyclical buffer from 1 per cent to zero.  His replacement Andrew Bailey went further.  Interest rates were cut by another 15 basis points to a record-low 0.1 per cent on 19 March and it restarted quantitative easing with another GBP 200 billion of government and investment grade bonds.

Swiss National Bank (next meeting: June 18th)

The Swiss National Bank appears to have carried out its largest intervention in currency markets since January 2015  after sight deposits at commerical banks surged to a record CHF 620.5 billion in March.  Safe haven demand amidst the pandemic pushed the Franc to a five-year high versus the Euro despite the interventions.   The SNB also set up a Covid-19 refinancing facility to boost the supply of credit in the banking system and deactivated the countercyclical buffer for banks to free up more than CHF 20 billion of capital.

Market Issues:

  • Risk appetite collapsed as the death toll from the coronavirus mounted and global stock markets suffered their worst quarter since 2008 – the 22% fall of the MSCI All-World Index was the second-worst quarter on record.  Credit markets also suffered large drawdowns as bond ETFs and funds saw record outflows which overwhelmed market makers and liquidity evaporated.  A spike in default rates is inevitable despite the extraordinary support provided by governments and central banks.
  • The oil price collapsed to an almost two-decade low after a price war broke out between Saudi Arabia and Russia and demand plummeted as large parts of the global economy shutdown.  Prices dropped as much as 30 per cent immediately after Russia refused to join production cuts with Opec and Saudi Arabia responded by pledging to boost supplies to record levels.  The slump continued, causing devastation in the US shale industry, and both Brent Crude and West Texas Intermediate fell more the 50 per cent on the month.
  • Argentina pushed back its 31 March deadline for concluding debt restructuring talks with international creditors for a least two more weeks as the outbreak of the coronavirus pandemic disrupted progress.  Economy Minister Martin Guzman is pushing for a deep haircut on USD 83 billion of foreign debt  but other options, including lower interest rates, longer maturities and a payment grace period are also being discussed.  A deal with private creditors is precursor for a new programme with the IMF which has already provided USD 44 billion of loans.  The country’s century bond fell to 26 cents on the dollar.
  • Lebanon failed to repay its USD 1.2 billion bond due to mature on March 9, triggering its first ever default.  The Middle East nation with more than USD 90 billion of debt outstanding, equivalent to around 170 per cent of its GDP, is fighting fiscal, monetary and economic crises and a painful IMF-led structural reforms lie ahead, including deep cuts to its public sector, pension reforms and measures to tackle corruption and tax evasion.  Its sovereign bonds fell to around 20 per cent of face value.

Credit Markets:

  • The United Kingdom was downgraded from AA to AA-, with a negative outlook, by Fitch due to concerns over the impact of the coronavirus pandemic, its “fiscal loosening stance” and ongoing uncertainty over the post-Brexit trade relationship with the EU.  The rating agency warned economic output could fall nearly 4 per cent this year and government debt will increase to around 9 per cent of GDP, up from 2.1 per cent in 2019.  It expects the Coronavirus Job Retention scheme will cost 1.3 per cent of GDP, assuming it is in place for three months.
  • Ford (Ba2/BB+), with USD 36 billion of debt outstanding, became the biggest fallen angel of 2020 after it was downgraded Standard & Poor’s to speculative grade.  It was also cut one notch further by Moody’s.  Closed factories due to the coronavirus pandemic, the deteriorating global economic outlook, declining sales at home and abroad all contribute to a very challenging operating environment for the automaker.   Its 7-year bonds issued in January this year have fallen to 85 cents on the dollar but traded at low at 62 cents earlier in the month.
  • Occidental Petroleum (Ba1/BB+) was for a brief period the largest fallen angel year to date following downgrades from Fitch, Moody’s and Standard & Poor’s.  The exploration and production company has been hit hard by the oil price war and collapse in demand due to the health crisis.  Although it cut its dividend for the first time in 30 years and cut back capital spending plans, which combined should save around USD 4 billion, the rating agencies warmed weaker cash flows and higher debt leverage leave it more vulnerable to a prolonged slump in oil prices and execution risk around previously planned asset sales has increased.  Its 7-year bonds issued last August fell to 53 per cent of face value.
  • Mexico (A3/BBB) was downgraded one notch by Standard & Poor’s to BBB due to the additional strains on its challenging economic outlook from the spread of the coronavirus and oil price rout.  Mexico’s economy was forecast to stagnate prior to recent events and a harsh recession is now likely which will push its fiscal positon further into the red and undermine business confidence.  The sovereign downgrade triggered a similar cut to state owned Petroleos Mexicanos (Baa3/BBB), the world’s most indebted oil company.
  • Oracle Corp (A3/A+) withstood a two notch downgrade by Moody’s on 30 March to issue USD 20 billion of bonds on the same day, the largest US investment grade bond sale since AbbVie raised USD 30 billion in November.  An order book of more than USD 50 billion enabled Oracle to upsize the deal from a planned USD 15 billion offering and proceeds will be used for general corporate purposes which could include stock repurchases, dividends, debt payments and acquisitions. The sale was spread across six parts, with maturities ranging from 5 to 30 years.

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