Financial markets were extremely turbulent in March, driven by a high level of uncertainty and fear regarding the impact of the COVID-19 pandemic on the global economy. The S&P 500 index declined 20.0% in the first quarter and the average option adjusted spread on investment grade corporate bonds (based on the ICE BofA US Corporate Index) widened more than 200 basis points. At the end of the first quarter, the yield on 2-year Treasuries was down 132 basis points year-to-date, and the yield on 10-year Treasuries was down nearly 125 basis points, as a global flight to quality put downward pressure on yields.

There are still many unknowns about the coronavirus and the outlook for the economy remains uncertain, but we believe the US economy entered a recession in March. Containment efforts and supply chain disruptions will likely cause a sharp increase in unemployment and a swift and deep contraction in economic activity. In the March 28 week, 6.6 million people filed an initial claim for unemployment, following 3.3 million initial claims in the previous week. These figures indicate that the employment report for April will be very weak and that the unemployment rate is already approaching 10%. Financial markets will likely remain volatile over the near-term, but we believe large-scale global monetary and fiscal stimulus programs will help mitigate the longer-term economic impact of the pandemic. At this point, we believe a U-shaped economic recovery heading into 2021 is possible.

The speed and level of fiscal and monetary relief from the federal government and Federal Reserve in the last month has already surpassed the financial crisis. President Trump approved a $2 trillion economic relief package on March 27, the largest fiscal stimulus package in US history. We believe it will take a few weeks to fully implement the program, but small businesses have started to apply for paycheck protection program loans and direct payments to households are expected to go out in a few days. Fiscal relief from the government has been complemented by a wide range of aggressive actions by the Federal Reserve to help stabilize and provide liquidity to the financial markets. During March, the Fed lowered the fed funds target rate by a cumulative total of 150 basis points to a range of 0.0%-0.25% and said it will purchase Treasury and agency mortgage-backed securities in any amount needed to support smooth market functioning. Policymakers reinstated the Commercial Paper Funding Facility and Money Market Mutual Fund Liquidity Facility in order to provide liquidity to the commercial paper, money markets, and the municipal bond markets. The Fed also established the Primary Market Corporate Credit Facility and Secondary Market Corporate Credit Facility to support the corporate bond market. The Term Asset-Backed Securities Loan Facility was established to enable the issuance of asset-backed securities backed by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration. The Fed has provided short-term funding through large-scale repo operations and lowered the reserve requirement for depository institutions. Policymakers are also working on a Main Street Business Lending Program to support lending to small-and-medium sized businesses. Looking ahead, we would not rule out the possibility of another phase of fiscal and/or monetary stimulus, depending on the duration of the social distancing guidelines and ultimate impact on the economy.

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