Financial Markets Firm Despite Lurking Risks

Posted on July 13th, 2020

Federal Reserve buying of debt securities continued in the second quarter under the Secondary Market Corporate Credit Facility program, which was established to maintain liquidity in the bond markets. Individual corporate bonds and ETFs have been part of the Fed’s buying program, which was launched in mid-June. Bonds purchased so far include debt issues from both investment grade and non-investment grade rated companies.

Corporate and government bonds continued to post positive returns in the second quarter, as yields stabilized following the dramatic drop in yields during the first quarter of the year. The benchmark 10-year Treasury bond yield closed at 0.66% at the end of June, helping to boost consumer lending and mortgage rates.

Equities also rebounded in the second quarter, with all eleven sectors of the S&P 500 Index positive for the quarter. Sectors with the most advancements included consumer discretionary, energy, materials and technology. The upswing in these sectors is largely attributed to the anticipation of an economic recovery as well as the Federal Reserve’s buying spree, but remains vulnerable to the risk of a resurgent pandemic.

The technology heavy Nasdaq Index has outperformed the S&P 500 and the Dow Jones Industrial Index both year to date and for the second quarter. Some stock analysts believe that the disparity in performance is reminiscent of the dot-com expansion 20 years ago, suggesting further lurking risks for investors.

Sources: S&P, Nasdaq, Dow Jones, Bloomberg, Treasury Dept., Federal Reserve