The Federal Reserve (Fed) announced on Monday to enlarge its scope of asset purchases, now including corporate debt under its Secondary Market Corporate Credit Facility. So far, this program allowed buying ETFs, from now on, the Fed will also buy a diversified portfolio of individual corporate debt.
We do not know yet if the Fed’s so-called corporate bond index would be made public – which we doubt given that it would trigger a rush toward the bonds of companies being part of the index, but the details of how the Fed would implement its strategy is clear. This means that the Fed has found a way to come directly to the rescue of distressed companies.
Fed buying corporate debt means that companies will have lighter liabilities against their debt holders and a clearly reduced risk of bankruptcy for their shareholders.
Of course, the Fed’s plans to buy individual corporate debt has been mouth-watering for equity investors, who rapidly put aside the mounting worries of a second wave Covid-19 contagion. The Fed proved once again that it has illimited resources to prevent a market sell-off and to keep asset prices artificially bloated for the sake of the economy. It feels almost like there is nothing to fear for investors; most of the default risk is now shouldered by the Fed. So yes, there is a clear message sent to the market here, go out and buy all you can afford.
In this respect, even Hertz was approved to raise up to 1 billion US dollars of new equity by selling shares to public last week, while it was bankrupt.
US indices reversed early losses and closed Monday’s session in the green.
US futures soared in the overnight trading session. Dow (+1.85%), S&P500 (+1.43%) and Nasdaq futures (+1.16%) hint at a bullish run on Tuesday.
Asian equities recorded strong gains. Stocks in Australia rallied up to 4.30%, the Nikkei jumped 4.17% and the Hang Seng gained 2.95%.
Activity in FTSE (+2.50%) and DAX futures (+3.00) point at solid gains in Europe as well.
The US dollar was offered along with the US treasuries. The 10-year yield rebounded to 0.75% as investors rushed to equities and corporate bonds. The US dollar index slipped below the 96 mark.
The G10 currencies surfed on the weaker dollar.
By Ipek Ozkardeskaya
