When John Donne wrote the famous book, No Man is an Island, he most certainly wasn’t thinking about residential mortgage credit. But the idea of interconnectedness has universal applicability and lies at the heart of the SEC’s newly released report titled “U.S. Credit Markets Interconnectedness and the Effects of the Covid-19 Economic Shock.” This report, issued on October 14, 2020, describes in detail the stresses experienced by the credit markets immediately following the shutdown of the US economy in early March 2020 in response to COVID-19. The report is thorough and data driven. It identifies a cohort of approximately $54 trillion of credit issued and outstanding in the US financial system at the end of 2019 and traces the flow of that credit through various intermediaries during the period of time studied by the report. The data in the report supports a widely-held view that credit markets are interdependent, directly linked through a myriad of complex, interconnected transactions.
The report studies several different markets to illustrate their level of interconnectedness, namely, (i) short-term funding markets, (ii) corporate bond markets, (iii) leveraged loans and CLO markets, (iv) municipal securities markets, (v) residential mortgage markets and other consumer lending markets and (vi) the commercial mortgage markets. With respect to each of these markets, the report examines COVID-19-induced stresses of different types, which fall into three categories.