The financial world is taking a breath this month after being spanked in March, time which has given investors an opportunity to identify what happened.

Four factors stood out that were unusual about the market moves in March, according to Janus Henderson global head of fixed income Jim Cielinski.

At the time, investors started dumping stocks as the world realised the COVID-19 virus had breached China’s great walls and become a pandemic.

Corporate lenders and bond markets were jittery in February and froze the following month, forcing reserve banks and governments to flush huge sums of money into the financial sector in order to keep debt markets functioning.


1. A quick collapse

Cielinski said the speed, the amount of forced sales, the rapidity with which policymakers stepped in, and how exchange traded funds (ETFs) behaved were the four unusual elements that occurred in March.

“Most importantly it was the speed of the decline,” he wrote in a note.

“Bid/offer spreads, a primary indicator of liquidity strains, ballooned to three to four times their normal levels, and the depth of the market shrunk dramatically.

“Equally unusual was that this move was witnessed across the board and infiltrated even the safest of assets, such as US government bonds.”


2. Less debt, more cash

There was a brief period of forced asset sales but this didn’t last long, which indicates how much less debt there is in the system today than when the global financial crisis hit in 2008.

“Following a wave of asset deleveraging in mid-March, the selling from these groups has tapered off, hinting that this crisis is different,” Cielinski said.

“Investors are more defensively positioned this time around. Importantly, the degree of systemic leverage is much lower across the financial system today.

“In the GFC, financial institutions were highly levered, leading to a liquidity crisis as funding was cut off, forcing a massive disposal of assets held within these levered structures. Today, we have less systemic leverage, but more investors are positioned in less liquid structures and non-financial corporations carry more debt.”


3. Hooray for bankers

Central bankers stepped in quickly, some within days, “with unprecedented size and speed” to deal with liquidity issues.

The US federal reserve set up a $US700bn ($1.1tn), then $US1tn, then unlimited bond buying program.

The European Central Bank has a €750bn ($1.44tn) asset purchase program to help maintain liquidity in the Eurozone.

And in Australia the RBA cut benchmark cash rates again to 0.25 per cent, created a $90bn funding facility to help foster lending to small businesses, and is spending billions to keep the three-year bond yields at or near 0.25 per cent.


4. ETFs do actually work

Cielinski’s last point was around ETFs. The financial product has long been touted as a source of liquidity when times get rough, but as they weren’t nearly as popular in 2008 that theory has never been really put to the test.

“Under the circumstances, they did relatively well, accompanying derivatives as the areas of the bond market able to absorb huge volumes,” he said.

“ETFs overshot in the short-term as sellers flooded the market, and there was a focus on how much of a discount some ETFs traded at relative to underlying assets. But much of this discrepancy was ephemeral.

“With the only liquidity in the market available in ETFs, quoted prices of many individual cash bonds simply failed to keep up with reality, giving the appearance of a large divergence that simply was not tradeable.”


The winners and losers

Unsurprisingly, risky high yield bonds and bank loans have been hardest hit by the crunch.

Cielinski says investment grade bonds, government bonds, and high-quality mortgages are the winners from the government and reserve bank support.

So far, the March credit and financial market crunch has not come close to the severity of the GFC. But where that crisis began in 2007 and didn’t finish until 2009, this crisis has been far swifter, which Cielinski suggests could mean a recovery will be quicker as well.