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Bond market outlook after record jump in jobless claims

As the number of Americans filing for unemployment benefits jump to new levels, treasury yields came off of their lows. ETF Trends CIO & Director of Research Dave Nadig joins Seana Smith to discuss.

Video Transcript

SEANA SMITH: Welcome back to Yahoo Finance. It's now time for ETF Report brought to you by Invesco. We have markets continuing to climb here for the third day in a row, down now back above-- or, actually just dropping below 1,000, up 980 points. This comes as treasury yields do come off their recent lows following that historic jump that we have been talking about on the show today, and jobless claims at 3.3 million number last week.

Well, for more on the recent market action, let's bring in David Nadig, ETF Trends CIO. And, Dave, I mean, this is pretty crazy time. Let's first talk about what's been going on with the bond market, because we haven't been talking about that as much here on the show. And we saw a lot of ETFs, I guess, trading at big discounts, at least relative to their net asset values. When we take a look at what's going on in fixed income, how should we read that?

DAVE NADIG: Yeah. So what we saw here was a disconnect between what I would call the live market for bonds, which really became the ETF market in the sort of heat of this four or five days ago, and the prices that get assessed in NAV, which often don't have anything to do with recent trading. So the NAVs of mutual funds and bonds tend to-- and ETFs-- tend to lag real cash trading, sometimes by several days.

And so what we saw when we got these really sharp down moves in the bond market-- you know, 10%, 15%, really unprecedented moves down-- the net asset values of these funds took days to respond. And it created the appearance of a real disconnect.

What was really going on here, though, with the ETFs became price discovery for bonds that weren't trading, for bonds that you couldn't get a bid on at all. And now after a few days, we're seeing those premiums-- the discounts really collapse as we've seen some recovery in the underlying ETF trading. But also, we've seen those net asset values really come down to reality where the cash bond market is.

SEANA SMITH: Dave, where are you seeing just investors favor at this point, just because there's still so much uncertainty out there? Obviously, the Fed has been very aggressive in the measures that they have been taking so far. But it almost seems like investors don't really know how to react at this point.

DAVE NADIG: Well, we are doing some really unprecedented things. The Fed has announced that they're not only going to come into the market and buy corporate bonds, which has never happened in the United States. They're going to come in and actually buy exchange traded funds that invest in corporate bonds-- specifically those that are trading at a discount.

So what we saw happen on that announcement, which was really Tuesday afternoon when we got the note that BlackRock would be running that program, BlackRock's liquid bond fund LQD immediately went from trading at a discount to trading at a premium. Everybody piled in. We've seen $2 billion flow into that fund in just the last two days.

I think people are hoping that because the Fed's going to be essentially a bottomless buyer of corporate debt that that's a great place to be right now because, in a sense, you've got a Fed put. Right, you've got an opportunity for somebody else to take it off your hands.

SEANA SMITH: Dave, why don't you think we've seen more demand for gold? I mean, right now it's trading at $1,646. And when you put it into perspective here, it hasn't exactly been that safety play that maybe many were expecting it to be.

DAVE NADIG: Well, I think people had some unrealistic expectations that, somehow, if we had a 22% down in the S&P over a couple months, which is about where we're at year to date, that you would see gold rocket to the moon. And we haven't seen that. But what we have seen is gold has done exactly what you want it to do. Gold is actually up 8% or so this year so far, while the market's down 22%. And we've got the broad bond market up about 2% or 3% as well.

So, you know, we-- it's hard to see this in the midst of the crisis and the chaos, but what we actually have seen is plain old diversification has really worked. So no, it hasn't given you day-by-day anti-correlation to the stock market. But that's not really its job. Its job is to be a store of value when the value of everything else is getting a little bit hard to predict. And that's what it's done.

SEANA SMITH: All right. Dave Nadig of ETF Trends. Thanks for joining us this afternoon.

DAVE NADIG: Thanks for having me.

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