Invesco's latest "Global Fixed Income Strategy" publication features a brief entitled, "Fixed Income Liquidity - What Did We Learn from the COVID-19 Crisis?" It tells us, "The Invesco 2020 Global Fixed Income Study and the conversations with 159 global investors late last year offered a common view that we were late in the economic cycle. Almost half of respondents felt that we were less than a year from the next downturn with credit spreads at extremely tight levels. Investors were concerned about liquidity but the survey also showed that, over the past two years, institutions have increased allocations to less liquid fixed income in their search for yield.... We speak with Invesco Fixed Income portfolio managers Laurie Brignac and Matt Brill about their experiences managing liquidity during the March selloff." Invesco asks, "Were the markets any better prepared for liquidity shock compared to 2008?" Brignac answers, "I think it's important to recognize how much reform went into effect after the 2008 global financial crisis. Many new regulations were put into place to make our financial system and banks more stable and able to withstand another financial crisis. This was really the first crisis that tested these new reforms. We think the regulators did a terrific job addressing problems quickly. But post-2008, the plumbing in the financial system has changed quite a bit, and that was part of the problem we faced in March. However, the authorities were also very effective in building on the programs of 2008 and changing them to make them work in 2020." Brill explains, "We have always favored keeping some excess liquidity for periods of volatility. One thing we aim to do is avoid being a forced seller. We believe if you can avoid being a forced seller, you can survive a crisis much more successfully.... The first stage of our response centered on reducing beta and improving liquidity in our portfolios to guard against spread widening or potential outflows. The second stage centered around the potential for rating downgrades and major bond price declines. The guard against that, we relied on our credit research capabilities. We have a watch list at Invesco Fixed Income that includes every bond or company that we believe could be downgraded from investment grade to high yield. Our goal is to place issuers on this watch list well in advance of any credit trouble." Brignac also says, "When you get inflows of over USD1 trillion in a matter of weeks, there is likely going to be a supply-demand mismatch in the front end of the curve. Recall that in early March, the Fed was actively buying short-term US Treasuries, trying to inject more reserves into the market. Then with the outbreak of the crisis, a huge volume of money flowed into government money market funds in the span of two or three weeks. It created a massive imbalance with too many people chasing too few assets. As a result, for the first time ever, we saw pervasive negative yields in the US Treasury bill market.... Again, the authorities were very proactive. We provided feedback on the need to issue more US Treasury bills and the US Treasury was very responsive."
