All The Fed Can ‘Safely’ Chew, And Our Short Junk Bond Position

The notion that the US Federal Reserve would actually buy any corporate debt whatsoever would’ve been virtually unheard of (well, maybe) just a few months ago. 


Well, in the first bazooka this go-round, as long as it was investment grade the Fed could buy it. Okay, but not junk bonds, right?


Well, that’s where they went with this morning’s announcement. Any company’s debt that moves from investment grade to junk from here on is fair game, plus, the Fed can now buy junk bond ETFs… Of course that news blew SJB (our ETF that shorts junk bonds) out of the water this morning. Yesterday it was up 9.9% on the year, as I type it’s up 3.1% (-6% today).


So we dumped it just after the open; we added to our gold position (up 10.6% ytd, with today’s rally) with half the proceeds, the other half to cash for now.


Now, this could be a position we revisit in the not-too-distant future, as — per my last highlight below — the Fed is biting off all it can chew, and some, I fear.


Here’s Bloomberg’s James Crombie:   emphasis mine…

“(Bloomberg) — The Fed’s move to support junk bonds in its $2.3 trillion crusade to save key companies and munis adds a new twist to the virus battle: moral hazard. The central bank may also end up owning a lot of very
risky debt as the economic shutdown extends.

Given an expected $200 billion in fallen angels, the Fed had no choice but to add BBs to its shopping list, which was previously limited to BBBs. If a bond was rated BBB-/Baa3 on March 22 then cut to BB-/Ba3, the Fed can now buy. But the speed at which this crisis is unfolding gives no assurance that the next move for that debt isn’t a B, or even a CCC rating.

The Fed’s probably hoping today’s announcement will be as effective as on March 23, when it spoke and the high-grade market appeared to fix itself. It’s boosting sentiment and liquidity, but can’t fix the growing balance-sheet risk, especially for companies with no cash flow. Its high-yield backstop gives investors more confidence to take junk risks without bearing the full costs.”

Share:
Share on linkedin
Share on facebook
Share on twitter
Share on email
Share on pinterest

Recieve Between the Lines Posts to your Inbox

Sign up for lorem ipsum delores sin.

We care about the protection of your data. Read our Privacy Policy.