Following the unprecedented falls across all financial markets in recent weeks, the safest government bond markets have had to become cash vaults for fund allocators trying to raise the liquidity needed to plug the fast-growing holes left by the equity, corporate bond and commodity sell-offs.
A decade of intense monetary easing has redirected investors in their frantic search for yield towards less liquid assets or lower rated bonds and this is precisely what has precipitated the fast deterioration in financial conditions.
A by-product of the Covid-19 pandemic is that central banks are again called to the rescue to reassert themselves as both lenders and, this time, buyers of last resort.
Bond markets' addiction to low rates and quantitative easing programmes will not be left unsatisfied for the next 12 months (if not more).
In a matter of two weeks, the US Federal Reserve slashed 1.5% from its main rate and announced a fresh $700bn asset purchase programme, returning to the driving seat of global monetary policies and financial asset valuations.
By the words of Fed chair Jerome Powell himself, "a rate cut will not reduce the rate of infection".
However, the Fed's decision has positive implications for the rest of the world, particularly in advanced economies where central banks entered 2020 out of monetary ammunition.
Lower rates in the US will soften debt servicing costs in emerging markets via a lower dollar and will create policy space via real rate differentials.
Additional easing will be required despite G10 yields sitting at historic lows as the economic costs of lockdowns become real and fiscal stimulus programmes seem unavoidable at this stage.
The main consequence for bondholders is that yields will remain suppressed for most of the year, and buying opportunities in the credit world will be up for grabs for those funds that manage to navigate the lack of liquidity over the coming months or until confidence that the virus can be suppressed gains traction.
David Arnaud is senior fund manager, fixed income and manages the LF Canlife Global Macro Bond fund at Canada Life Investments
• Government bond yields reached new historic lows, underpinning returns in fixed income
• Indiscriminate selling in corporate bonds will eventually translate into buying opportunities for selected names
• Credit spreads widening back to 2016 levels and receiving little support from banks
• Bond funds focusing on liquidity position at a time of outflows