Insights
Liquidity vs. Solvency = Fed vs. Fiscal Stimulus
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Market Pulse
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March 23, 2020
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Liquidity vs. Solvency = Fed vs. Fiscal Stimulus |
The key to solving the financial crisis that has evolved from the Covid-19 pandemic is, in our view, preventing a crisis in the liquidity of financial assets to becoming a solvency crisis for corporations and businesses small and larger. The Federal Reserve is designed to solve liquidity problems, but solvency needs to be addressed by the Federal Government. This is why it is essential for a sizable and properly targeted plan from lawmakers (House & Senate) to be agreed upon and put into action.
The Fed is taking unprecedented action to solve liquidity conditions in the bond market and money market instruments, which should filter through as benefits for riskier assets. Below is a summary of the highlights of just some of the actions both taken and proposed from the Fed.
Many of these programs require the Fed and Treasury to work together. This requires legislation from Congress, which is expected in the next day or two, the complete details of which are yet to be seen. If properly coordinated, we believe these support facilities can address many of the liquidity and solvency issues facing the market and alleviate some of the uncertainty and allow the market to form a well-supported base.
RISK CONSIDERATIONS
There is no assurance that a Portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the Portfolio will decline and may therefore be less than what you paid for them. Accordingly, you can lose money investing in this Portfolio. Please be aware that this Portfolio may be subject to certain additional risks. Fixed income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes. Mortgage- and asset-backed securities are sensitive to early prepayment risk and a higher risk of default, and may be hard to value and difficult to sell (liquidity risk). They are also subject to credit, market and interest rate risks. Certain U.S. government securities purchased by the Strategy, such as those issued by Fannie Mae and Freddie Mac, are not backed by the full faith and credit of the U.S. It is possible that these issuers will not have the funds to meet their payment obligations in the future. High-yield securities (“junk bonds”) are lower-rated securities that may have a higher degree of credit and liquidity risk. Public bank loans are subject to liquidity risk and the credit risks of lower-rated securities. Foreign securities are subject to currency, political, economic and market risks. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed countries. Sovereign debt securities are subject to default risk. Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. Restricted and illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk).
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Managing Director
Global Fixed Income Team
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