As Fed Wades Into Credit, One Bank’s Clients Are ‘The Most Bearish On Fundamentals We Have Ever Seen’

Steve Mnuchin told CNBC on Monday that he authorized a wire this morning for the Fed’s secondary corporate credit facility.

“It’s on its way out”, he said.

It wasn’t immediately clear whether he meant Treasury had authorized the initial $25 billion committed to the facility, or whether the buffer was being topped up to allow for more Fed leverage. 

Whatever the case, the market is anxious for the Fed to start buying credit ETFs. Purchases are expected to commence any day, followed shortly by buying of individual issues. This is part and parcel of the reason why outflows turned to inflows, and why LQD (the most popular investment grade credit product) went from “broken” in March (when a wide discount to NAV opened up) to now having recouped nearly the entirety of its losses.

The latest data from Lipper showed IG funds enjoyed a fourth consecutive inflow last week, marking a continuation of the remarkable turnaround from a truly harrowing stretch during the worst days of the panic.

In addition to catalyzing the return of inflows, the Fed has also managed to keep the market open for corporate borrowers who are, in some cases anyway, desperate.

Indeed, one of the most astonishing aspects of the risk asset rally from the March lows has been the record IG issuance witnessed over the last two months.

As noted on Sunday, it’s not hard to explain the supply side of this equation. Companies need cash and they need it now, so they’re tapping revolvers, drawing down credit lines and, if they can, issuing debt.

What would be inexplicable absent the Fed’s backstop is the demand side. That is, how is it that the market is wide open for corporate borrowers at a time when the outlook for corporate profits has never been this uncertain? Again, it’s the Fed, and in that regard, Jerome Powell may have done taxpayers a solid. After all, the more capital corporate management teams can raise from tapping the market, the less they’ll need in any prospective government bailouts. Just ask Boeing.

IG issuance in April was $296.6 billion. In March, it was $261.4 billion. The old record (from January 2017) was a comparatively paltry $175.5 billion. The cumulative YTD total is now in excess of $810 billion.

(BBG)

The juxtaposition with the outright collapse of the US economy and attendant plunge in corporate profits is stark, something underscored by the latest BofA US credit investor survey.

“Given recent activity in the primary markets it is no surprise that both IG and HY credit investors expect issuance volumes the next 12 months to exceed the prior period, a major shift from expecting lower supply most of the time since the financial crisis”, the bank’s Hans Mikkelsen writes, in a note dated Monday.

Although cash levels are low for IG and HY investors, Mikkelsen notes that “the view that inflows over the next three months will be strong [is] enabling companies to issue a lot”.

“With all this supply, and being in a recession, it makes sense that IG investors are the most bearish on fundamentals we have ever seen, as [a] net 91% expect lower quality trends, while their HY counterparts are the most negative since December 2008”, he goes on to say.

(BofA)

So, there you go: high-grade credit investors are the most pessimistic on fundamentals ever in light of a supply deluge against the backdrop of a Depression with a “D” recession, but have “taken advantage of the crisis sell-off to build the largest overweight position in three years”.

One is immediately reminded of what BofA said just last week.

“Note to Fed: A lot of investors (including non-credit ones) have bought IG corporate bonds the past two months on the expectation they can sell to you”, the bank chided. “So it would be helpful if you soon began buying in size”.