A Retrospective: COVID-19's Impact on Fixed Income Markets

No one could have predicted what was going to happen in 2020 as a pandemic paralyzed the global economy, as well as financial markets, and caused unprecedented tragedy around the world. As long-term fixed income investors, we have managed through market upheavals caused by Long-Term Capital Management in 1998, the global financial crisis of 2008 and the taper tantrum in 2013, just to name a few. But the past 18 months or so have been different from these past events in many ways.

Perhaps the biggest difference was the way liquidity in fixed income markets evaporated early last year (2020) when the lockdowns started, and certainly on the front end of the curve where it became almost impossible to execute trades. Dealers clearly were not going to use their balance sheets, so the amount of distress in the front end of the market was much worse than even the global financial crisis when we saw a money market fund break the buck.

Also, during the pandemic was the first time in our careers where we saw no market at all—it essentially disappeared, and investors were trading by appointment. If you needed liquidity, you were at the mercy of whomever had money at the time—that's something we never experienced in 2008. We had fear and counterparty risk back then, especially in light of the collapse of Bear Stearns and Lehman Brothers, but it wasn't as if there wasn’t a market to trade in. People were still trying to do rational analysis, trying to figure out the extent of housing fraud, trying to figure out where the bottom might be. In 2020, in comparison, everything simply shut down and the markets basically said, "We can't figure this out. We are not open for business." At least, for a time.

The interesting part about the pandemic environment was that we didn’t see dealers go under like we did in 2008. In fact, the global financial crisis probably helped banks weather the pandemic in a way that they wouldn’t have been able to before due to the heightened focus on risk management and new regulations that followed.