• The result of the breakdown in OPEC negotiations with Russia was a 1 day drop in oil prices of over 25%. This massive move downwards also put pressure on credit markets, specifically high yield. US High Yield bonds fell 3.1% on March 9th alone and are now down 4.9% for the year, even in the face of significantly falling rates.

• Many companies are reviewing their earnings guidance to incorporate how the coronavirus has affected growth. As risk mitigation measures like social distancing spread, business growth is likely to be affected by the disruption, which could be reflected in Q1 and Q2 earnings. 

What are we watching going forward? 

• The rate of growth of infected cases, and global mitigation efforts. Now that the virus has reached more areas of the world, governments are primarily focused on mitigating the effects of continued spread rather than containment of the disease. It’s important that governments proactively approach this and are willing to provide fiscal stimulus when necessary.

• The effects in credit markets from the fall in the price of oil. The largest sector issuer of High Yield debt is the Energy sector. As these debt-laden companies are forced to operate in a low price environment, it will be important to monitor price action and liquidity in credit markets when these companies are in need of short-term financing.

What about the macro backdrop in the U.S.?

• With outside events affecting U.S. equity markets, it’s important to note the continued strength of the U.S. consumer and their importance to U.S. economic growth.The consumer continues to hold low debt levels relative to history, and the labor market continues to be strong, as seen with the Non-farms payroll report on March 6th exceeding expectations (payrolls rose 273,000 in February vs. estimates of 175,000).

• The net effects of the fall in interest rates and the price of oil should only improve the position of the U.S. consumer going forward. These effects may not be seen instantly, but lower oil prices means more discretionary income for consumers to spend elsewhere. The largest effect may be the fall in long-term interest rates and the potential for consumers to refinance mortgage debt. A boom in refinancings essentially acts as a form of fiscal stimulus, affording the U.S. consumer greater monthly spending power. Based on past experiences, refinance activity begins to pick up when a refi will result in savings of about 50 basis points [Graph 4].  As we have reached that rate over the past two weeks, it is increasingly likely that consumers will begin to refinance their long-term debt.