While bid-ask spreads remain elevated across all fixed income asset classes, they have moved off their worst and widest levels of recent weeks.

This positive development is largely a result of the European Central Bank starting its Pandemic Emergency Purchase Programme (PEPP) in large size, the Federal Reserve being active in the US fixed income markets, the accumulation of various policy support packages, and of course two strong days of equity market performance.

Other stress indicators have improved as well, such as funding conditions in money markets, while even the lower-end investment grade and high yield markets are seeing some buying interest outside of new issues. However, we are still a long way from normal activity.

Apart from significantly wider bid-ask spreads, there is little doubt that some structural issues remain. For example, the cash/CDS basis in credit, the difference between a bond’s credit default spread and its cash spread, suggests that long positions in cash bonds hedged with CDS protection is a street-wide position and hence possibly spells trouble ahead.

Source: Fidelity International, 26 March 2020.
Andrea Iannelli

Andrea Iannelli

Investment Director