SINGAPORE (Apr 24): Covid-19’s market impact has not only led to losses in equities (the MSCI ACWI Index demonstrated a –21.3% performance for 1Q2020) but also to extreme levels of volatility among investment-grade corporate bonds as investors fled to cash. Major investment-grade fixed-income ETFs experienced price discounts of up to 6% to their reported net asset value (NAV), a level not seen since 2008. The one month at-the-money (ATM) implied volatility of the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) (see chart 1) peaked at 63.4% on March 19 before the Federal Reserve (the Fed) announced it would buy investment-grade corporate bonds, including ETFs linked to that market. By the end of the quarter, one month implied volatility fell to 26.4% but implied volatility remained elevated.

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The MSCI USD Investment Grade (IG) Corporate Bond Index returned –2.50% over 1Q2020, though that doesn’t tell the whole story. It plots the duration-weighted option-adjusted spread (OAS) of the index on the left and the cumulative total returns and excess returns on the right. The index spread was at relatively tight levels of 107 basis points (bps) as of Dec 31 last year but started widening on Feb 19 as Covid-19 spread. To counter the anticipated economic slowdown, the Fed cut the benchmark interest rate by 50 bps on March 3. However, it was not until March 23 — when the Fed pledged to buy government bonds in unlimited amounts, and to purchase investment-grade corporate bonds and provide liquidity to the market — that the OAS started to ease from its peak of 338 bps, slipping to 246 bps at the end of the quarter.

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