The Fed Surprisingly Tried to Buy Bond What is the Fed’s Next Step
The Federal Reserve (Fed) announced a new round of stimulus plans on March 23, aimed at calming the market and mitigating the impact of the new coronavirus pandemic on the US economy. The Fed said it would, among other things, buy an exchange-traded fund (ETF) that tracks the corporate bond market, the first time the Fed has taken such a measure.
The U.S. Federal Reserve is stepping through its bottom line step by step to respond to the economic crisis shrouded in the current epidemic. Among the many measures announced on Monday (23), in addition to maximizing the horsepower of the money printing machine, most people may be most surprised that they may decide to buy a bond ETF, which is the first time the US Central Bank has done so.
Expectations of rising corporate default rates have also increased pressure on transactions. Goldman Sachs analysts believe that even if the Fed tries to inject liquidity into financial markets, the default rate on high-yield bonds will soar to 13% by the end of the year.
They also pointed out that the outflow of bond funds has been driven by ETFs and expected that the corporate bond market will remain challenging, which may lead to continued outflows of ETFs in the short term.
Financial markets have been hit hard in the past few weeks. The new crown virus pandemic is sweeping the globe, the global economy is slowing, and the oil market is collapsing. Investors in all markets are racing to “sell all products.”
This illiquidity dysfunction may be particularly severe for higher-rated corporate bonds, as they are less risky than “high-yield” or junk-grade bonds. Investors are not accustomed to considering such a large wave of defaults and bankruptcies, but because cruise operators and oil pipeline operators face nearly zero cash flow, this wave may be coming.
At the same time, Goldman Sachs analysts had expected that even if the Federal Reserve re-takes measures in a crisis era to inject liquidity into financial markets, the default rate on high-yield bonds will soar to 13% by the end of the year.
High yield bond default rate may rise to 13%
They also pointed out that the outflow of bond funds has been driven by ETFs and expected that the corporate bond market will remain challenging, “this may lead to continued flow of ETFs in the short term.”
It is worth noting that the Fed previously introduced a new primary dealer credit facility to provide low-cost loans to major Wall Street securities dealers, increasing liquidity for major Wall Street dealers, and eliminating the need for ETFs and other types of Assets are used as collateral.
Still, many observers appreciate the Fed’s commitment to doing everything it can to mitigate the impact of financial markets. FHN Financial chief economist Chris Low said after the Fed’s announcement: “Congress is boasting, but the Fed is working hard to restore the US economy.”
Expectations of rising corporate default rates have further increased pressure. Lehmann, Livian, and Chief Investment Officer of Fridson Advisors Marty Fridson said that on March 20, the main benchmark indicator of the US junk bond market, ICE BofA, was higher than US Treasury bonds after the transaction 1,009 basis points.
The Fed Surprisingly Tried to Buy Bond ETFs - /10
The Federal Reserve (Fed) announced a new round of stimulus plans on March 23, aimed at calming the market and mitigating the impact of the new coronavirus pandemic on the US economy.