Can the Fed Cope with the Corporate Crisis? Bond investors are betting on it

The Federal Reserve has proved that it knows how to maintain credit flow in times of crisis.

But bond investors now expect the Fed’s unprecedented stimulus slope around the financial markets to bend over the credit cycle, meaning it was expected only months before more companies stopped feeding.

“It’s a major axiom that businesses don’t lose by default because they’re losing money,” Steven Oh, global head of credit and fixed-income leverage at Pinebridge Investment in Los Angeles, said in an interview with Marketwatch. “Businesses default because their access to liquidity dries up.”

Hertz Global Holding Inc. HTZ,
JC Penny Company Inc. JCP,
And Frontier Communications Corporation
American companies are in the midst of the Holocaust, which already b a. According to Global, there were defaults on the high-yield debt of $ 52.6 billion combined.

To help stabilize credit in the early stages of the shutdown imposed on cities and businesses during the epidemic, the Federal Reserve, for the first time in history, began purchasing US corporate debt, initially exchange-traded funds in May and a month. after. Through the lump sum purchase of individual bonds.

The Fed promised not to “walk like an elephant” through the corporate bond market, and its latest tally shows that approximately $ 44 billion of the $ 750 billion has been invested for the sector. Nevertheless, its motivational efforts have had a dramatic impact. Despite new and alarming rates of coronovirus infection in parts of the US, including California, Florida and Texas, the rebound has swept through both the equity and debt markets.

The US stock index lowered US-China relations on Friday and policymakers in Washington exceeded the next pandemic stimulus package, but the S&P 500 index SPX,
The Dow Jones Industrial Average DJIA, to date, is 0.5% away from compensating for all its losses.
A similar recovery ended 7.3%.

IShares iBoxx $ Investment Grade Corporate Bond ETF LQD,
The largest of its kind, Friday’s session lost 0.2%, but up 7.9% to date. The rest of the debt markets have also declined, reduced by declining credit spreads, or at the level of compensation investors are paid on a bond, such as the Treasury TMUBMUSD10Y, such as a risk-free benchmark.

More so, despite high-yield bond spreads this week of a $ 228 billion flood of new Treasuries. B. of global statistics. Similarly, investment-grade spreads have sunk to an all-time low of 243 basis points, even with a record $ 1.3 trillion issuance, according to JP Morgan data, a benchmark similar to this week.

This means that investors are being paid very little to buy corporate bonds, because they were doing US business only a few months ago, while US businesses were borrowing at record clips and the pace of the US economic recovery from the epidemic Remained uncertain.

Meanwhile, the central bank’s balance sheet now sits at the bottom of about $ 7 trillion to $ 7 trillion in March, primarily due to the program buying unlimited bonds of US government-backed debt during the epidemic.

“The point is going, the Fed outpaced the risk appetite,” said Jack Janasiewicz, the portfolio manager of Natixis Advisors, in a webinar on Thursday, where he estimated that only 10% of the Fed’s total capacity so far tapped has gone.

“The money returned to the credit markets. Mission accomplished by the Fed, ”he said.

Read: Why the Fed is credited to Tom Sawyer

Importantly, according to JP Morgan data, the worst stocks selling the epidemic in March are also selling high-level bonds, which have also shrunk from distressed levels to about 18% at 41 levels. Traditionally, high-yield, or “junk” bonds are considered distressed, and more likely to default, once they trade on a risk-free benchmark such as the US Treasuries with a spread of more than 1,000 basis points .

In addition, a. B. of Global Analysts with a view of a set of credit stress indicators for higher yields have now shown the peak default phase of this cycle to be about half that may have already ended.

Oleg Melantyev-led team wrote in a customer note on Friday, “The body of evidence is growing that it can not only be unique in a way, but it can also start in a way.”

Credit-rating firm Moody’s Investors Service also said this week that it expects the next year’s current 7.3% default rate for US speculative-grade companies to reach 10.5% next year, which Goldman said for this year 13% below Sachs is below forecast.

“Do you think this is the right thing or the wrong thing, because of technical conditions by the Fed – not only because of the direct purchase of corporate debt, but because of its liquidity support in Treasury markets and other markets – as a result of this Ohio is going to be said that investors are moving towards riskier asset classes.

“We will see a reasonably high default rate for this year,” he said. “But our expectations of default from two months ago are substantially lower today.”