Kroll Bond Rating Agency (KBRA) releases a report on four forces shaping investor sentiment toward the coronavirus (COVID-19) pandemic’s impact on credit markets over the near term.
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The speed at which COVID-19 has impacted the global economy and the degree of devastation is unlike anything seen since the Great Depression. In the U.S., a surprisingly massive monetary and fiscal response, coupled with largely successful efforts to “flatten the curve” of cases threatening to overwhelm the health care system, has effectively reassured markets—for now—that worst case scenarios have been kept at bay.
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We are now entering a new phase, one of gradual reopening of the economy. On balance, taking into consideration crosscurrents buffeting individuals and businesses, KBRA believes that a relatively constructive phase has been reached, based on:
- The commitment and motivation of the Federal Reserve and Congress to do “whatever it takes”
- Progress on a vaccine and/or treatment protocol neutralizing COVID-19, and
- Signs of a more balanced policy reconciling the cost of lockdown versus the cost of reopening to offset
- The risks of a growing humanitarian crisis.
Our view covers the near term. In the U.S., this all hinges, of course, on just how successful federal relief and stimulus intervention is in holding together the nation’s economic and societal fabric through what is forecast to be the worst of the storm—Q2 2020 and its immediate aftermath.
We remain vigilant on risks related to the reopening of the economy, noting that relaxing terms of the lockdown, even gradually, may increase the likelihood and severity of a second viral outbreak hitting in the fall/winter. Over the longer term, we expect the behavioral scars and secular changes in the way that individuals and firms go about their business will slow economic recovery. In addition, credit investors will need to consider any potential drag of the extraordinary budget deficit that is developing.
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