Fed Engineers $1 Trillion Miracle In US Corporate Bond Market
Some will call it an astounding feat in light of the economic circumstances and evidence of smashing success for a Fed determined to avert systemic credit events in a crisis.
Others will invariably characterize it as a dubious milestone, indicative of the moral hazard the central bank has unleashed with its corporate bond-buying programs.
Whatever you want to call it, US investment grade issuance topped the $1 trillion mark on Thursday for 2020. That is a record for the first 149 days of any y
H-Man, good post.
Thanks. It’s funny — this one will get swamped today given all the big names in the other posts, but this piece is actually pretty important.
When the Fed announced their intent to dip their toes in the realms of IG, I put some cash into the HYG ETF, count me as one if those not convinced the Fed actions will not create a moral hazard or simply delay the inevitable down the road, but if the Fed is bound on preventing a credit crisis, why not buy some and get the yield in the mean time? Gotta squeeze some pennies out of the bond market bail out while it lasts.
Great, more companies with bloated balance sheets and limited growth prospects. This can’t possibly end well but at what point will that be? Asking for a friend who wants to retire in 5 years.
The Fed is undertaking the financial equivalent of trying to “bend the curve” so that the financial system is not overwhelmed with defaults/bankruptcies. Buying time to develop more effective therapies perhaps but there is no vaccine or cure for what ails the economic world. A lost decade followed by secular stagnation may be a realistic goal. At least we have fresher air to breath these days. . .
First inning of an extra inning game of moral hazard. A bit too soon to be kissing J. Powell’s ass.
Keep the champagne on ice.
Better yet don’t bother to order it yet
Moral hazards, free riding (an example of which you have in the comments above) and adverse selection are very secondary considerations at this point. The Fed understands the long term corrosive impact of moral hazard problems on market function –but when the house is burning down, time debating whom of those trapped inside deserves to be saved is, well, not time well spent.
I agree with H’s premise: this was a masterful (and efficient) move to create confidence in the face of panic. Even Congress, this time, passed a stimulus package early enough to make a difference.
Will we use the time that’s been bought, wisely? (Did we prepare well when watching China deal with Covid-19?)
Will there be a second crisis of confidence if defaults cascade? (Retail and Tourism, Commercial Real Estate -> REITS, States and Municipalities)
What other weapons do they have besides bazookas?