The Federal Reserve has demonstrated that it knows how to maintain credit flow during a crisis.
However, bond investors are now also expecting the Fed's unprecedented momentum in the financial markets to turn the credit cycle by preventing more companies from getting in the gut than was expected a few months ago.
"It is a key axiom that companies don't default because they lose money," said Steven Oh, global credit and bond debt manager at PineBridge Investments in Los Angeles, in an interview with MarketWatch. "Companies fail because they run out of liquidity."
Hertz Global Holding Inc..
J.C. Penney Co. Inc..
and Frontier Communications Corp.
are among the flood of US companies that, according to B. von A. Global, have already defaulted on high-interest debt totaling $ 52.6 billion this year.
To prevent loans from freezing during the first rounds of closings imposed on cities and businesses during the pandemic, the Federal Reserve began buying US corporate bonds for the first time in history, initially through exchange-traded funds and one in May Month later by buying individual bonds directly.
The Fed has promised not to run "like an elephant" through the corporate bond market, and its recent record shows that it holds approximately $ 44 billion of the $ 750 billion in funds earmarked for the sector. Even so, the effects of his stimulus efforts were dramatic. The recovery has hit both equity and debt markets, despite new and alarming rates of coronavirus infections in parts of the United States, including California, Florida and Texas.
US stock indices closed lower on Friday as US-China relations were down and Washington policymakers were arguing over the next pandemic stimulus package, but the S&P 500 index
ended 0.5% from offsetting all of the losses to date during the Dow Jones Industrial Average
ended 7.3% from a similar recovery.
The iShares iBoxx $ Investment Grade Corporate Bond ETF
The largest of its kind ended Friday's session 0.2% lower, but rose 7.9% year-on-year. The rest of the debt markets have also recovered, which is underlined by waning credit spreads or the amount of remuneration investors receive for a bond over a risk-free benchmark like Treasurys
In addition, according to B. von A. Global Data, high-yield bond spreads hit a new post-COVID low of 528 basis points versus US Treasuries this week, despite the flood of $ 228 billion in new issues a year. Similarly, investment-grade spreads fell to an all-time low of 243 basis points this week against the same benchmark [JPMorgan data], even with a record $ 1.3 trillion issue.
This means that investors are paying far less for buying corporate bonds than a few months ago, even though US companies have taken record-breaking loans and the pace of the US economic recovery from the pandemic remains uncertain.
The central bank's balance sheet now stands at just under $ 7 trillion, compared to $ 4.2 trillion in March, mainly due to the unlimited bond purchase program for US government bonds during the pandemic.
"The point is that the Fed has stopped risk appetite," said Jack Janasiewicz, portfolio manager at Natixis Advisors, in a webinar on Thursday in which he estimated that only about 10% of the Fed's total capacity had been used up to now.
“Money came straight back to the credit markets. Mission accomplished by the Fed, ”he said.
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It is important that the potion of high yield bonds, which are now trading at a distressed level, shrank from 41% to around 18% during the worst sell-off of the pandemic in March, according to JPMorgan. Traditionally, high yield or "junk" bonds are considered non-performing and are more likely to fail if they are traded with spreads of more than 1,000 basis points above a risk-free benchmark such as US Treasuries.
In addition, B. of A. Global analysts looking at a range of credit stress indicators for high yield bonds now see around half, which means that the maximum default phase of this cycle may already be over.
"The number of evidence is growing that this cycle is not only unique in the way it started, but also in its way," wrote Oleg Melentyev's team in a customer release on Friday.
Rating company Moody & # 39; s Investors Service also expects this week that the current default rate of 7.3% for US companies with speculative credit ratings will reach 10.5% next year, which is below that of Goldman Sachs for this year forecasted 13%.
"Regardless of whether you think it's right or wrong, the technical conditions set out by the Fed will be – not only because of the direct purchase of corporate bonds, but also because of its liquidity support for the treasury and other markets overall – lead to investor demand shifting towards riskier asset classes, ”said Oh.
"We will see reasonably high failure rates this year," he added. "But our expectations for failures from two months ago are much lower today."