Case Study: The March 2020 Dash for Cash
In March 2020 the COVID-19 shock triggered a global dash for cash in which investors sold almost everything to raise dollars. Strikingly, even US Treasuries (the world’s benchmark safe asset) sold off, so their yields rose instead of falling. Dealers could not absorb the wave of selling, liquidity evaporated, and credit spreads on corporate bonds blew out. On 23 March 2020 the Federal Reserve pledged open-ended purchases of Treasuries and agency mortgage-backed securities and launched emergency credit facilities, acting as a market-maker and lender of last resort until markets stabilised. The episode shows that a liquidity crisis can strike even the safest market, and that a central bank balance sheet is the backstop.
Why it matters
A safe asset is only as safe as your ability to sell it when you need cash right now. When every fund, foreign holder, and leveraged trader scrambles for dollars at once, they sell what they can rather than what they want, and that selling overwhelms the dealers who normally make markets. Once nobody will quote a price, even Treasuries trade badly. The lesson is that in a true scramble for cash only the central bank can stand on the other side of the market at scale, which is why the Fed bought rather than just cut rates.
Worked examples
In a normal recession scare, investors flee to Treasuries and their yields fall. In March 2020 the 10-year Treasury yield fell to a record low near 0.5 percent on 9 March, then rose sharply over the following week. Why did the safe asset behave abnormally?
This was a liquidity event, not a flight to safety. Investors facing margin calls and a scramble for dollars sold their most liquid holdings (including Treasuries) to raise cash. The selling swamped dealer balance sheets, so Treasury prices fell and yields rose even as fear spiked. Normal safe-haven demand only returned once the Fed stepped in as buyer.
A corporate treasurer watches investment-grade bond spreads jump toward roughly 4 to 5 percentage points and high-yield spreads toward double digits in mid-March 2020, then snap back after 23 March. What changed?
The blow-out reflected the risk structure under stress, as default and liquidity premia surged when no one would hold credit risk. The snap-back followed the Fed’s 23 March pledge of open-ended asset purchases plus new corporate-credit facilities. Acting as lender of last resort to the market restored confidence, so spreads narrowed well before any defaults actually materialised.
Common mistakes
- ✗US Treasuries always rally in a crisis. In March 2020 they sold off and yields rose, because investors dumped even safe assets to raise cash in a liquidity scramble.
- ✗The Fed fixed the panic by cutting interest rates. Rates were already near zero, so the decisive move was quantitative easing at unprecedented scale plus emergency facilities, not the rate cut itself.
- ✗Wide credit spreads in March 2020 meant a wave of defaults was certain. Spreads spiked mostly on liquidity and fear, and they narrowed sharply once the Fed backstopped the market, long before realised defaults.
Revision bullets
- •March 2020 was a dash for cash in which even Treasuries sold off and their yields rose
- •Dealer capacity was overwhelmed, liquidity vanished, and credit spreads blew out
- •On 23 March the Fed pledged open-ended asset purchases and credit facilities, acting as market-maker and lender of last resort
Quick check
What made the March 2020 dash for cash so unusual compared with a typical flight to safety?
On 23 March 2020 the Federal Reserve’s decisive action was to
Connected topics
Sources
- Federal Reserve (23 Mar 2020)Board of Governors of the Federal Reserve System. Federal Reserve announces extensive new measures to support the economy. Press release, 23 March 2020.Open-ended Treasury and agency MBS purchases and the new emergency credit facilities (PMCCF, SMCCF, TALF).
- NY Fed, Liberty Street Economics (2022)Federal Reserve Bank of New York. The Global Dash for Cash in March 2020. Liberty Street Economics, July 2022.Treasury-market dysfunction, the global scramble for cash, and the breakdown in dealer intermediation.