The risk of bankruptcies is big without a lot of govt support, says the MD & Global Head of Rates Strategy at TD Securities.


How do market watchers like you are navigating these tough times, because one day the market is rallying and the other day there is a lot of nervousness about resurgence of Covid cases. What are people like you looking at? What are the cues you are watching out for?
As you highlighted, there are unprecedented times. We are all having to become more creative in terms of the way we look at markets. What we are dealing with clearly is an unprecedented shock to economic activity, but we have also had unprecedented stimulus, both from the fiscal and the monetary sides. We heard from US Fed Chair Powell over the past two days about how they are not even thinking of raising rates.

Now there is a tug-of-war between the fundamental macros. The data has measurement issues, plus the fact that we are reopening. So the data is likely to be positive. We have to look at how are we reopening, to what kind, are we reopening to the world like the way it existed in February, or is it a new normal? We are more cautious on that front.

Central banks are trying to provide a lot of liquidity to build this bridge, but on the other side, it looks like this is what we are trying to grapple with. All markets have responded to the stimulus to liquidity, but now the focus is going to move to solvency and default risk. So I am a little cautious here on risk assets and, therefore, I like treasury rate. Interest rates do provide that hedge against concerns around a second wave. I would argue in parts of the US, we are not out of the first wave. India is certainly dealing with that first wave right now. We have to first get over the first wave and then we will talk about if there a resurgence until there is a vaccine. Our view is it is going to be a really weak recovery.

Absolutely. If you see not just in the US, where some states are reporting really high number of Covid cases, even in emerging economies — look at what is happening in Brazil, look at what is happening in India — the numbers are really worrisome. We are talking about more testing and tracing and that is really going to bump up the numbers significantly in terms of Covid infections. Having said that, you made a very interesting point that it is not just about liquidity anymore, and it will now be about solvency. Which are the sectors where you see the risks emerging, because we see a lot of disruptions in certain key sectors like airlines, tourism and hospitality. Do you see solvency risks emerging from these sectors or is it going to perhaps spill over a little bit to the financials as well?

I think financials are exposed, because they do have exposure to all of these sectors. It is becoming, and when it becomes, clear that we are not reopening to what we knew of the world before Covid, then certain sectors where you almost rely on getting people– such as entertainment, sports, leisure, hospitality — it is hard to see them sustain. In the new normal where there is going to be some form of social distancing, the question would be do we get another fiscal package. Unfortunately, we have an election coming up. It is highly politicised. I do not know, I am probably not very hopeful that we get something that prevents the default risk. Unless we provide another big social safety net, which protects these industries until we get a vaccine or until confidence comes back, you are likely to see that pickup in bankruptcies. And then it is likely to just remain in that sector. So you either give a lot of government support or it is hard to see it remaining contained.

Also remember, a lot of them will issue bonds. So now if certain bond funds start taking losses on the default front in the event of a crisis, or you tend to sell what you can sell rather than what you necessarily want to sell, which is what we saw in March as well, when some of the higher-rated company spreads got widened or equities got hurt. So I can see it certainly spilling over, if the default risk picks up.

Since we are talking about the action by various central banks. The US Federal Reserve Chair has already said they will do whatever it takes. They are also now looking to buy US corporate bonds. Having said that, the Bank of England has added to its bond-buying programme. Do you think in terms of ammunition, the central banks of maybe US or England are in a much better position to handle the crisis than some of the central banks in emerging economies?
Right. When you are talking about emerging markets, forex reserves can sometimes become a constraint. So I think that does lower the ammunition so to say for some of the central banks. I think the more open an economy is, the harder it is for that central bank to keep things under control. I will highlight all central banks right now. All they can do is keep markets functioning and they can help absorb the government debt. No central bank can really resolve the public health crisis that we are in, which is why the second wave or an acceleration of the first wave becomes that dangerous. Certainly among the markets, the emerging world has a little bit of a harder task for those central banks, because they have to shore up reserves.







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