Quincy Krosby couldn’t wait for Monday’s trading session to end. “I was glued to the screen”chief equity strategist at LPL Finance.
It was just one of those days with losses so gigantic that just looking at stocks wasn’t enough. His eyes strayed to bonds, credit default swaps and elsewhere as he tried to figure out how bad things were and how bad they could get.
What he saw was ugly. Even by the standards of this volatile year, Monday’s wild ride in financial markets stands out.. Two-year US Treasury yields rose 29 basis points as bond prices sank. The yield jumped 54 basis points from Thursday nightthe biggest two-day rise since 2008, a sign of how quickly traders are tightening where they think the Federal Reserve will take interest rates.
All but five S&P 500 stocks plunged and the benchmark index posted a more than 20 percent loss from its January high, thus entering a bear market.
Cryptocurrencies crashed so violently that a popular lending platform froze withdrawals to prevent a very modern bank run. In old-school currencies, the US dollar index rose to the highest level in nearly two decades as investors sought safety. For some, it was enough to resurface frightening memories of the global financial crisis more than a decade ago.
Christian Hoffman, portfolio manager at Thornburg Investment Management, said that market liquidity has deteriorated so much you’re thinking back to the dark days of 2008. “Liquidity in the market is worse than before Lehman,” said Hoffman, who worked at the company that collapsed at the time, triggering the worst financial crisis since the Great Depression. It’s the kind of problem that can greatly exacerbate losses.. “That creates even more risk, because if the market is illiquid, it can gap very quickly.”
Since a shockingly high inflation report on Friday, investors are increasingly concerned that the Fed will have to tighten monetary policy so aggressively that it drives the economy into a recession.
Economists from JPMorgan Chase & Co, Goldman Sachs Group and Nomura Holdings joined their peers from Barclays and Jefferies on Monday. to ask the central bank to announce a 75 basis point hike on Wednesdaywhich would be the largest increase since 1994.
Instead of serving as a haven at times like this, the Treasury market and its huge surge in yields has become a catalyst for the market crash. Priya Misra was reminded of former President Bill Clinton’s political adviser, James Carville, who observed that she would like to be reincarnated in the bond market given how intimidating she is.
“It was a whole day. Like a freight train approaching and you can’t turn anywhere for help,” said Misra, global head of rates strategy at TD Securities. “Today the bond market was there in all its ferocity!”.
Subadra Rajappa, head of US rates strategy at Societe Generale, said that the lack of liquidity, some “panic selling” and margin calls contributed to Monday’s drop. But even that couldn’t fully explain market moves, he said.
Rajappa spent all day fielding client calls and sneaking between internal virtual meetings while working from his Manhattan home. Some customers were scratching their heads trying to figure out why the markets have been so sold. “People are trying to process what’s behind these big moves,” Rajappa said. “We do not know for sure”.