Overview
The Fed’s announcement included a number of ‘bazooka’-style measures, with the partial inclusion of high yield within their ETF purchases taking most market participants by surprise. With this latest step, the central bank is venturing further into unchartered territory, having only just started buying corporate bonds. However, the announcement provided a much-needed boost to high yield which had, until then, lagged the broader market - both from a liquidity and performance point of view - having missed out on prior central bank support.
The impact of the Fed announcement on the rest of the market has been swift and very pronounced. We have seen a very material tightening of credit spreads across the board. Liquidity and estimated transaction costs have improved as a result, further tightening bid/ask spreads and gaining back some additional market depth.
The road ahead
As spreads have recovered most of the Covid-induced widening, the road ahead for credit markets is arguably less obvious than a few weeks ago, with valuations now more balanced. The improvement in risk appetite has also had an impact on new issue premia, where, while volumes remain elevated, we no longer have the same concessions and discounts that were available in the past few weeks.
Still, market liquidity has plenty of room to improve further as central banks remain very active and in some market segments (developed market rates, for instance) we are not too far from pre-crisis trading conditions. Yet, significant dislocations are still apparent across fixed income. Working closely with dealers, and specifically having a good gauge of their inventories, remains key for us as we continue to look for opportunities to maximise trading efficiency.
Despite central bank easing measures still in play, the Covid-19 crisis is far from over, and will continue to drive market sentiment and liquidity conditions for some time to come.
