The COVID-19 pandemic caused chaos in global financial markets during March. As investors realized the highly contagious disease would require extraordinary measures to control its spread, and that those measures would cause a severe economic shock, equities and other so-called risky assets plummeted in value. The TSX, for example, had its largest single day decline since Germany invaded France in 1940 and the S&P 500 at one point had fallen by more than 35% from all-time highs reached only a month earlier. With self-isolation and social distancing becoming the norm, many businesses faced drastic reductions in revenue, and massive layoffs began. Central banks reacted to the rapidly slowing economy by sharply lowering their short term interest rates, as well as taking steps to ensure commercial banks had adequate liquidity and financial markets continued to operate smoothly. On the fiscal front, budgetary deficits ballooned as governments of all levels initiated large scale programmes to help counter the economic downturn by providing support to both individuals and businesses. The economic shock to Canada’s economy from fighting the pandemic was exacerbated by a plunge in world oil prices initiated by Saudi Arabia. The price of the key Western Canadian Select grade of oil dropped to an uneconomic $5.00 per barrel, further damaging the economies of Alberta and Saskatchewan. Faced with tremendous uncertainty, many investors pulled back from the markets, which led to illiquid conditions and unprecedented volatility in bonds as well as other asset classes. The FTSE Canada Universe Bond index returned -2.00% in March as higher valuations for federal bonds were offset by declines in the provincial and corporate sectors.

Economic data received during March was not timely enough to show the extent of the slowdown, but announcements of closures and layoffs made it clear that the Canadian economy had gone into a serious, if not severe, recession. Late in the month, news that a million people had applied for Employment Insurance benefits in a single week emphasised the need for both monetary and fiscal stimulus. The Bank of Canada responded to the deteriorating economic conditions, lowering its overnight interest rate by 50 basis points on three different occasions in March. In all, the Bank’s target rate fell from 1.75% to 0.25%. The Bank also took steps to bolster the banking sector’s liquidity, entering into $50 billion of term repurchase agreements with Canada’s Big Six banks, as well as starting to buy provincial treasury bills to improve their liquidity. In addition, the Bank announced it would purchase at least $5 billion of Canada bonds a week until the recovery is well underway. Unlike many other major central banks, the Bank of Canada had heretofore avoided Quantitative Easing (QE), so its adoption indicates the Bank’s concern about the present situation. On the fiscal front, both federal and provincial governments announced a plethora of policies aimed at supporting individuals and companies impacted by COVID-19. Budget deficits were estimated to increase by 3% to 5% of GDP in the hopes that the crisis would be relatively short lived. For the federal government, the increased deficits would be largely offset by the Bank of Canada’s weekly purchases, but the provinces’ higher deficits would mean substantially more issuance and that caused provincial yield spreads to widen.

In the United States, misguided comments by president Trump and federal incompetence meant that much of that country had a delayed start to fighting the pandemic. While some states initiated social distancing and lockdowns early on, most did not, which will likely have both tragic human implications as well as a larger than otherwise necessary economic impact. Congress did pass a mammoth $2 trillion fiscal stimulus bill, but it may not be sufficient to offset the impact of the rapidly spreading disease. The United States already has more than twice the number of confirmed COVID-19 cases compared with China, and the death toll is rising sharply. The U.S. Federal Reserve cut rates twice, including a highly unusual emergency 100 basis point reduction on a Sunday in mid-March. The Fed’s rate cuts took its overnight target to its effective lower bound of 0.00%.

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