And again on March 12, the Fed pledges to pump trillions of dollars into the financial system. The European Central Bank also rolls out a package of measures.
But then comes a crucial mis-step. ECB president Christine Lagarde says the central bank is “not here to close spreads” in the bond market — taken as a hint that she will not support Italian debt at all costs. Italian bonds sustain the biggest fall on record. Ms Lagarde apologises three days later.
From here the pressure on stocks is relentless.
The S&P 500 suffers the worst day since the 1987 Black Monday market crash and you’ve lost nearly a quarter of your initial $100 investment.
Adding to the storm, Donald Trump announces a ban on flights from Europe.
This was the most expensive speech in history,” says Luca Paolini, chief strategist at Pictet Asset Management. “Investors are voting with their feet, and I don’t blame them.”
By this point, daily double-digit declines in stock markets around the world have become the norm and corporate bonds become impossible to trade.
Then we hit the point of peak fear.
The reason: the government bond market.
US government bonds, or Treasuries, are ultra-safe assets that always rally when the going gets tough, helping to balance out portfolios when stocks are in trouble. It is one of the most reliable dynamics in finance.
But Treasuries first become hard to trade, and then start falling. Ordinary investors and savers want their money back out of markets, and fast. The firms that manage their money can’t keep up with demand.
Normally, traders can hop in and out of Treasuries easily but now the system struggles to cope. The market is “overwhelmed by liquidity concerns”, as Bank of America analysts put it.
“It’s just not functioning. It is freaking people out,” says Gregory Peters, a senior portfolio manager at PGIM Fixed Income.