Fed’s Corporate Bond Buying Program Finds No Takers—Yet
Fed’s Corporate Bond Buying Program Finds No Takers—Yet
You’ve heard it said a million times by investors and pundits: “Don’t fight the Fed.” Indeed, we’ve said it in these pages. With its technically “unlimited” arsenal of financial firepower, the Federal Reserve Board can stimulate market activity in the direction that it favors. It’s not all powerful, but it’s perhaps the closest thing to it created by humans.
While this is no surprise to most investors, it’s always instructive to see it in action. And we just did. You really shouldn’t fight the Fed, even if it’s wrong.
Case in point. That this is true was proven pretty much conclusively by the recent action in the bond market. Exhibit one is an interesting story by The Wall Street Journal recently.
Back in March, the Fed promised a “what-ever-it-takes” corporate bond buying program. Now when the Fed says whatever-it-takes, that effectively means the sky’s the limit. The Fed can print unlimited dollars electronically by simply crediting to a bank’s account the Fed money for bonds that it might buy from that bank, for example.
Here’s the thing, as the WSJ, pointed out, the Federal Reserve thawed credit markets in March but it has yet to buy a single bond. In other words, just the announcement from the Fed that it would backstop the corporate credit market was enough to end the panic selling at the time. The Fed’s announcement boosted prices and even fueled a record surge of new corporate-bond sales.
Josef Stalin might have famously asked of the Fed, “How many divisions does the Fed have?” But the above action shows pretty conclusively how much power it does have. The Fed is supporting the credit markets, and that, in turn, is helping to calm stock markets.
Ironically, now companies are now reluctant to sign up for Fed purchases, according to the WSJ, because such a move could be seen as a sign of weakness during a market rebound. In a bit of irony, one of the reasons the Fed has yet to officially launch the initiative is that the technical details have yet to be worked out. It indicated the program would be ready this month.
Nevertheless, the Fed is truly powerful. The cost of borrowing for U.S. companies has returned to pre-pandemic levels. It did buy $3 billion in shares of exchange-traded bond funds, only a fraction of the up to $750 billion earmarked for corporate debt purchases.
Separately, the European Central Bank announced that it will raise its own bond-purchase program to €1.35 trillion ($1.52 trillion), in order to reduce pressure on the EU’s embattled governments. The amount was higher than expected and should help to absorb much of the €1 trillion or more of additional debt that eurozone governments are expected to issue this year as they battle the coronavirus pandemic. More money printing.
The yield on the benchmark 10-year U.S. Treasury note was 0.89% vs 0.65% one week previous.
Upcoming FOMC meeting on June 9-10. No action is expected but investors are looking for an economic update from the chairman in the press conference afterward. This might be his last press conference until September.
