Following the April FOMC meeting, I chided a handful of habitual Fed critics for what, in my judgement, was gratuitous attention seeking.
Seemingly everyone with a soapbox has taken to railing against the Fed’s decision to buy corporate bonds. That criticism is always couched in moral hazard terms, and in some cases, those doing the criticizing suggest taxpayers will invariably lose money. While taxpayers are on the hook for hypothetical losses in the Fed’s emergency facilities (via the Treasury backstop), there is no guarantee losses will materialize.
In fact, structurally similar programs used during the financial crisis ended up turning a profit. Below, for reference, is a visual that shows the Fed’s various facilities and the Treasury backstop which allows the Fed to lever up.
With that in mind, recall that April set a new record for high-grade corporate bond issuance.
It was a remarkable feat, coming as it did in the midst of the worst economic downturn in modern history and on the heels of March, which was itself a record. Let me reiterate: We have just witnessed back-to-back record months for investment grade issuance – in the midst of a depression.
As noted on Thursday evening in the linked post, a massive $25 billion offering from Boeing helped push April’s haul beyond March’s (now fallen) record. That deal was the sixth largest US corporate bond sale ever.
If you’re wondering how 2020 is stacking up versus history when it comes to supply, it’s no contest – at least not through the end of April.
“Corporations have taken advantage of the demand and have been filling bids like there’s no tomorrow”, Kevin Muir, formerly head of equity derivatives at RBC Dominion, said Friday. “No wonder Boeing was able to float their bonds”.
You should note that Boeing added stipulations to the deal that will see the rate rise in the event the company gets downgraded to junk.
Speaking of junk, high yield issuance was $37 billion last month. That’s the most in three years, and nearly 90% of the volume came following the Fed’s decision to take in fallen angels. March saw just $4.3 billion in junk supply.
It goes without saying (although I said it quite explicitly on Thursday) that the blockbuster month for issuance wouldn’t have been possible without the Fed’s backstop for corporate credit – that would be the same backstop that Fed critics have ceaselessly maligned since it was announced last month (the addition of fallen angels and high yield ETFs to the program only engendered more ill-will from some corners).
Now, when you think about all of the above, consider that, as Bloomberg reminds you in a post dated Saturday, it was “less than two months ago” when Boeing “went to Washington, hat in hand, asking for a $60 billion bailout for itself and its suppliers”.
Having plowed cash into buybacks, and still (mis)managing the fallout from the 737 debacle, the company wasn’t exactly a prime candidate when it comes to getting a taxpayer bailout. But, thanks to the Fed’s highly successful efforts to calm credit markets and tamp down spreads (which had ballooned wider), the company ended up not needing one after all.
“Boeing was never in imminent danger, and had $15.5 billion in cash at the end of March after it fully drew down a new term loan… but executives and Steven Mnuchin were deeply worried about the long-term damage to the company and airlines when the markets started to seize up in mid-March”, Bloomberg goes on to say, in the same linked article.
While the company’s suppliers are still imperiled, the combination of access to capital markets and government loans to airlines (key customers) means a high-profile, taxpayer bailout of the company is no longer something that’s likely. And it’s a good thing, because the optics would have been disastrous.
Of course, there’s no guarantee the company won’t ultimately have to ask the government for money, but for right now, it’s “funding secured”, to quote Elon Musk.
“As a result of the response [to the debt offering], and pending the closure of this transaction expected Monday, May 4, we do not plan to seek additional funding through the capital markets or the US government options at this time”, the company said, in a statement.
Seen in this light, the mere prospect of the Fed throwing its balance sheet behind the corporate credit market may have saved taxpayers as much as $60 billion, assuming the Trump administration and Congress had agreed to give Boeing and the aerospace industry the money the company said it needed.
Some critics remain unsatisfied, though.
“If the Fed has not actually been buying corporate bonds, the buyers at today’s prices… are simply hoping to sell to the Fed at today’s or higher prices in the future”, Jeff Gundlach mused, in a Friday tweet.
Critics will be critics.