You might be inclined to think market participants are suddenly nervous about the outlook for credit.
After all, Steve Mnuchin is engaged in something of spat with the Fed over the fate of the facilities which backstopped US corporate bonds this year.
I’ll just use the same language I often employ for this discussion. The Fed’s unprecedented support for investment grade corporate bonds and controversial decisions to buy fallen angels and high yield ETFs, together served as a Linus-style security blanket – a psychological support pillar of incalculable value to a market staring down a public health crisis that posed an existential threat to entire sectors of the global economy.
Thanks to the Fed, 2020 has been a year of record-shattering issuance for corporate borrowers, both investment grade and junk.
Inflows into corporate credit funds have continued almost unabated. In the week through Wednesday, high-grade funds took in another $4.14 billion on Lipper’s data (EPFR = $7.9 billion). There’s been just a single week of outflows since April.
High yield funds have had a few rough patches, but overall, it’s been smooth sailing with the Fed to thank.
Is all of this at risk with the Trump administration apparently bent on pandering to Senate Republicans, sabotaging the incoming administration, or both?
Not necessarily. Or at least not in corporate credit, for one very simple reason: There is no alternative.
BofA’s Hans Mikkelsen notes that the two facilities can be resurrected later using the ESF, but more importantly, he reminded investors that the global universe of negative-yielding debt is now back at record highs.
That matters for US corporate bonds.
“If one is concerned about the corporate bond market, consider that there is now a record level of $17 trillion of negative-yielding debt globally,” Mikkelsen wrote.
If you’re looking for yield, the US high grade market comprises just 13% of the global IG fixed-income world, but, as Mikkelsen went on to say, it “pays out a record 40% of yield income.”
“That’s the key driver of strength in IG,” BofA’s US high grade team remarked. “And nothing is changing there.”