PLANSPONSOR - April/May 2020 - 45

U.S. Investment-Grade Corporate Bond Market
Daily closing share prices, iShares U.S. Investment Grade Corporate Bond ETF, June 2003 - March 2020
$140
$120
$100
March 19, 2020
March 9, 2009
$80
October 2, 2008
$60
2003
Source: FactSet
market structure: " With September 11-
and the technology stock crisis wrapped
into it-the large Wall Street bond dealers
still played the role of steadying the market.
Then, in 2008, the dealers were part of
the problem. They had become smaller
in comparison with the market, and their
ability to take risk had been wiped out.
And, all of a sudden, the dealer community
that once helped create calm and separated
the fundamentals from the fear wasn't
there anymore to provide a cushion.
" Those events showed us that we
needed another forum to get bonds traded, "
Stokes continues. Although electronic
trading platforms make up much of today's
volume, in her view they are not enough to
take over completely from dealers. " We're
finding flaws with those systems now. "
Between year-end 2019 and this March
19, the share price of the LQD bond ETF
dropped about 18%, though it managed a
recovery through the quarter's end: Market
regulator Financial Industry Regulatory
Authority (FINRA) reported a 51% increase
in U.S. investment-grade bond trading in
March versus the preceding month.
Essential to keeping the bond market
functioning in the 2008 crisis were the
actions of the federal government-
the $700 billion Troubled Asset Relief
Program (TARP) rolled out in early October
that year, $250 billion of which was applied
to resuscitating the banking system and
financial markets.
" The Fed was broad in what securities
it would lend on, to try to put liquidity into
the system and allow the capital markets
to function, " recalls Tom Atteberry, portfolio
manager and partner at First Pacific
Advisors, an investment firm headquartered
in Los Angeles. " They weren't trying
to bail people out of losses, but you could
buy and sell if you wanted to. "
Government bond markets remained
fairly liquid, while the corporate, leveraged
loan and securitized markets locked up,
says Stokes. " One place we found liquidity
was in our Mexican government bonds.
That was one of the biggest and most liquid
bond markets in the world. "
Bond managers have since put the
lessons from 2008 into practice. " First,
have sufficient liquidity, " advises Pekker.
" We ensure that our clients have a sufficiently
large Treasury allocation, so that
if markets do become illiquid, they have a
way to raise cash to make benefit payments.
The second learning experience was that
DB sponsors need to model their fixedincome
exposures, and what sort of market
shock they can be comfortable with. "
The 2008 crisis was not without eventual
opportunities. Losses on securitized
mortgage bonds are legend, but, Atteberry
notes, securities in " critical assets " fared
well. " People defaulted on their mortgages
but knew they would not immediately be
evicted. But they needed to stay current on
their cars and credit cards, and businesses
needed equipment; those asset-backed
securities did pretty well. "
Stokes fondly remembers the outcome
for " crossover credits " in corporate
bonds-those companies on the financial
cusp between investment-grade and highyield
rating status. " You could stay away
from the defaults but take good risks and
buy at low dollar prices. The BBB crossover
space was the winner, hands down. "
What was it about March 9, 2009, that
was so helpful across markets? According
to the Center for American Progress, it was
the American Recovery and Reinvestment
Act (ARRA), signed into law by President
Barack Obama the month before. While
TARP had stabilized financial institutions
in late 2008, it was in the coming March
that the $800 billion ARRA stimulus
made its way into the economy.
While the U.S. and world economies
face more serious challenges from the coronavirus
than 2008's mortgage defaults, the
measures for restoring liquidity and fiscal
stimulus in the current crisis have been
swift and far more extensive. -John Keefe
PLANSPONSOR.COM April - May 2020 45
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