Junk Bonds’ Guardian Angel Is Only So Benevolent
In case you were curious, the Fed's decision to open its doors to fallen angels and include high yield credit ETFs in its secondary market corporate credit facility catalyzed the best one-day rally for high yield spreads in more than twenty years.
The ETFs themselves (using HYG and JNK as the poster children) each had their best sessions in a decade ahead of the long weekend, but the spread tightening (86bps in a single day, as illustrated in the top pane below) is a real eye-popper.
After off
“Natural”…..nice word….stay tuned,one of these days it won’t be March in Bond World.
I don’t get it. HYG consists of over 40% sub BB debt and recently fallen angels clearly don’t make up the rest. Is HYG up on the belief the Fed will ride to the rescue for everything (and who knows maybe they will) OR is the Fed going to buy enough of these ETFs to provide the backstop? It mentioned in the term sheet that the ETF purchasing plan was going to be a “preponderance” of IG debt. That’s pretty damn vague, but at least hints that they aren’t completely bailing these guys out.
I recall the Fed termsheet with BLK stated that IG bond ETFs would not be purchased at a premium to underlying. Anyone know if the termsheet for this latest Fed/BLK program has a similar constraint?
Since when did unacceptable outcomes get added to the growing list of Fed Mandates ???
Fed is only purchasing recent BB. The action may push investor risk appetite out into HY but that is a more gradual equilibrium. HY premium may dissipate in the short term.
The supply shock of a shut in economy may result in too much money chasing too little toilet paper. Especially when governments are seeking to shoulder private debt burdens. If TLT goes on tilt, the entire concept of MPT VAR could be unpopular for a generation. So HY premium may dissipate in the long term.
Drat