The Global CIO of Geggenheim Partners write
The market is waking up to not just the viral contagion of coronavirus, but also to financial, economic, and geopolitical contagion.
If I had written a commentary on how 4,000 people dying from the flu would topple global financial markets, I think I would have been deemed insane. Yet today that is exactly the story
After all, the World Health Organization estimates that influenza kills 290,000 to 650,000 people per year. How does this statistically small number of 4,000 versus a global population of 7 billion bring the market to its knees? I don’t think I have to explain that right now, but if anyone thinks I need to, feel free to reach out to me in a socially distant fashion once you have washed your hands for 20 seconds and then rinsed them in Purell.
Amazingly, the market is finally waking up to the prospects of not just viral contagion but also to financial contagion. The phenomenon of a relatively insignificant event cascading through an unpredictable series of circumstances resulting in a severe outcome has been referred to as the
“butterfly effect.”
conclusion
What next? I hate to admit this, but our proprietary models indicate that fair value on the 10-year Treasury note will reach -50 basis points before year end and the possibility that rates could overshoot to -2 percent.
Credit spreads have a long way to expand. BBB bonds could easily reach a spread of 400 basis points over Treasury’s while high yield would follow suit with BB bonds at 750 basis points over and single B bonds at 1100 basis points over. The risk is that it could be worse.
read full article below