Perhaps the greatest worry of many investors right now is the potential for this recent market selloff related to the COVID-19 outbreak to turn into a full-blown financial crisis like the one we experienced more than a decade ago. Here’s why I think investors ought to be a bit concerned, at least.
One big red flag investors can see clearly from the bond market (which, by the way, is many times larger than all equity markets combined, and most financial experts believe is more credible and predictive than the stock markets, largely for this reason) has been showing massive multi-trillion-dollar outflows from the investment grade bonds, with similarly sized inflows into treasury bonds.
When one considers that the proportion of investment grade bonds that are related BBB is 30% (BBB is one notch above “junk” status), one can clearly see that bond investors believe credit ratings are likely to take a hit, credit spreads will widen, and bond investors could get killed in the near to medium-term as we enter a recession, hence the flight to safety via treasuries.
These credit downgrades may mean banks have been lending at rates which do not fully reflect the appropriate amount of risk, as lenders use bonds as risk benchmarks, indicating a period of serious financial pain could be on the horizon for banks around the globe.
Invest wisely, my friends.
