The financial system is the bridge between savers and borrowers. The events of the past few weeks have exerted enormous presssure on banks, bond markets and stocks markets-- three key parts of this bridge. I want to focus on the turbulence in bond markets today with this piece from Barron's. The article reports that bond investors are pulling money out of corporate and municipal bonds and putting money into U.S. Treasury bond markets. This turbulence stems from the increased default risk that these debtors, especially corporations in highly affected industries like travel and hospitality, present. In general the flight to U.S. Treasuries is a flight to safety. Overall, companies have even higher leverage ratios than they were during the 2008 crisis, and this current shock will likely deteriorate their financial positions, and lead to downgrades in their credit ratings.
The article will draw on your understanding of different aspects of this financial market-- types of bonds, risk, and what determines the interest rate/yield. A bit of background to keep in mind while you are reading: money-market funds are funds that invest in short-term debt (with a maturity of less than 13 months). While not cash, they are highly liquid.
Monday Morning Update: The Federal Reserve who has already had a very busy few weeks, is jumping into action here as well. Usually the Fed is not very involved in corporate debt markets, but they have decided to purchase high-quality "investment-grade." Remember the "fire sales" in the MBS market during the Financial Crisis? By being a robust buyer of these securities, the Fed is hoping to prevent this now and keep credit flowing.
Test your understanding: Macoronamics Quiz #1
The article will draw on your understanding of different aspects of this financial market-- types of bonds, risk, and what determines the interest rate/yield. A bit of background to keep in mind while you are reading: money-market funds are funds that invest in short-term debt (with a maturity of less than 13 months). While not cash, they are highly liquid.
Monday Morning Update: The Federal Reserve who has already had a very busy few weeks, is jumping into action here as well. Usually the Fed is not very involved in corporate debt markets, but they have decided to purchase high-quality "investment-grade." Remember the "fire sales" in the MBS market during the Financial Crisis? By being a robust buyer of these securities, the Fed is hoping to prevent this now and keep credit flowing.
Test your understanding: Macoronamics Quiz #1
