A comparison of LQD snap back rallies 2008-2009 and 2019-2020
Short description:
Similarities between the 2008-2009
LQD
pullback and the 2020
LQD
pullback, paired with the subsequent snap back rallies from a technical standpoint. Looking at the comparisons between the two, the 2020 correction was about the same depth, however, the structural components of the correction were fundamentally different.
2008-2009 had the collapse of many small banks, auto makers, lenders, and two large banks (Lehman Bros and Bear Stearns).
2020 has not seen a complete collapse of similar proportions to support a lengthy correction, thus the snap back has occurred much faster. Additionally the fundamental difference is the change in swift policy and stimulus injections to stave off major components of what caused a deep and lengthy correction in the IG bond markets between 2008-2010.
While IG bond markets on a % basis didn't experience nearly the same crippling blow, the dollar value of the pull backs were similar. The overall structure of corporate debt now is probably similar if not slightly worse than in 2008-2010, however, the US banking sector is much better prepared for failures and defaults on loans with loan loss reserves covering roughly 10% of debt in the market.
-Fed policy shift
1) backstopping bond ETFs
2) unlimited repo activities
3) overall shift in macro strategy with fast actions and solve future problems after the fire is out
-Price action seems to follow stimulus and resumption of normal activities to a degree
1) large stimulus responses looked similar, and additional stimulus appears to spur activity in the bond market
2) IG bonds tend to stablize first following corrections and are first to move up followed by equities
-Increased supply of money appears to have a positive effect on credit markets
1) while in the moment, dollar scarcity has a large implication on pullbacks as well as on surges in price
2) when fiscal plumbing is corrected, the bond market is swift to add $10-$20 to price as the market is behaving naturally in the perpetual debt system.
Similarities between the 2008-2009
LQD
pullback and the 2020
LQD
pullback, paired with the subsequent snap back rallies from a technical standpoint. Looking at the comparisons between the two, the 2020 correction was about the same depth, however, the structural components of the correction were fundamentally different. 2008-2009 had the collapse of many small banks, auto makers, lenders, and two large banks (Lehman Bros and Bear Stearns).
2020 has not seen a complete collapse of similar proportions to support a lengthy correction, thus the snap back has occurred much faster. Additionally the fundamental difference is the change in swift policy and stimulus injections to stave off major components of what caused a deep and lengthy correction in the IG bond markets between 2008-2010.
While IG bond markets on a % basis didn't experience nearly the same crippling blow, the dollar value of the pull backs were similar. The overall structure of corporate debt now is probably similar if not slightly worse than in 2008-2010, however, the US banking sector is much better prepared for failures and defaults on loans with loan loss reserves covering roughly 10% of debt in the market.
-Fed policy shift
1) backstopping bond ETFs
2) unlimited repo activities
3) overall shift in macro strategy with fast actions and solve future problems after the fire is out
-Price action seems to follow stimulus and resumption of normal activities to a degree
1) large stimulus responses looked similar, and additional stimulus appears to spur activity in the bond market
2) IG bonds tend to stablize first following corrections and are first to move up followed by equities
-Increased supply of money appears to have a positive effect on credit markets
1) while in the moment, dollar scarcity has a large implication on pullbacks as well as on surges in price
2) when fiscal plumbing is corrected, the bond market is swift to add $10-$20 to price as the market is behaving naturally in the perpetual debt system.