Following the SEC's publication of "U.S. Credit Markets Interconnectedness and the Effects of the COVID-19 Economic Shock" (see our News yesterday), the Investment Company Institute published a report on "The Impact of COVID-19 on Economies and Financial Markets. (See their release, "Pandemic and Economic Shutdown Drove Financial Turmoil in March.") ICI says, "Financial markets' significant volatility in March reflected a combination of unprecedented factors, including the COVID-19 pandemic, global economic shutdown, and sudden demands for liquidity, ICI says in the first research paper in Report of the COVID-19 Market Impact Working Group, a new series examining the impact of the crisis. Based on empirical evidence and in-depth analysis, this first paper details the reaction of financial markets to the pandemic and the US government's response. Successive installments will describe the experiences of regulated funds -- and their investors -- including exchange-traded funds (ETFs), money market funds, and bond funds in the United States, and Undertakings for Collective Investment in Transferable Securities (UCITS) and ETFs in the European Union. ICI is serializing the report, releasing different papers throughout the fall, starting with "The Impact of COVID-19 on Economies and Financial Markets." ICI President and CEO Paul Schott Stevens comments, "A holistic appreciation of how financial markets reacted to the pandemic and worldwide economic shutdown is critical to understanding the experiences of funds and their investors during March. Dislocations began in the Treasury bond market several days before money market funds or bond funds came under redemption pressure. Though policymakers already are considering whether and how to bolster the financial sector's resilience, they must recognize that the COVID-19 crisis is different from the 2007–2009 global financial crisis. Policy solutions for the global financial crisis, which was a credit crisis, are not necessarily appropriate for the COVID-19 crisis, which was a liquidity crisis stemming from the global pandemic and steps taken by governments to curb the spread of the disease." ICI adds, "The COVID-19 crisis posed deep challenges around the globe for businesses, governments, households, investors, and financial institutions, including money market funds and bond mutual funds. As ICI's first paper discusses, these challenges arose as a direct result of COVID-19 and governments' decisions to shutter large parts of the global economy. Understanding this is a prerequisite to understanding money market and bond mutual funds' experiences in March 2020.... As ICI's paper discusses, strains in the Treasury and agency bond markets eventually spilled over into short- and long-term credit markets, including the markets for municipal debt securities, commercial paper, bank certificates of deposit, and corporate bonds. In light of uncertainty about the virus and the economy, investors became extremely risk averse and sought to preserve or bolster their cash positions. As a result, sellers of short- and long-term credit securities far outstripped the number of buyers.... By mid-March, liquidity in, and the flow of credit through, short- and long-term credit markets had virtually dried up, risking damage to households, businesses, governments, and financial institutions. With the demand for liquidity far outstripping the supply from the private sector, there was little choice but for central banks to fulfill their role as lenders of last resort." (Note: ICI's Paul Stevens is also scheduled to keynote our upcoming Money Fund Symposium Online, which is Oct. 27 from 1-4pm.)

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