An experiment in credit market sponsorship by the US central bank began on May 12 with its first corporate bond exchange-traded fund purchases.
The new world of government support began not with a bang but with a whimper.
Although the Federal Reserve bought $1.8 billion in its first weekly round of support, the effect on markets was muted, as it had already initiated a powerful global rally in credit spreads and spurred record debt issuance with the announcement in March that it would buy corporate bonds in both the primary and secondary markets.
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Matt King, Citi |
Veteran observers warn that provision of credit liquidity by central banks may simply delay elevated default rates and obscure market pricing signals.
“It has already had a hugely distorting effect on credit spreads,” says Matt King, global head of credit products strategy at Citi. “Investment grade spreads are hundreds of basis points tight and high-yield spreads around 1,000 basis points tight to where you would put them on fundamentals.”
The rally has been a strange one, with some participants feeling that they cannot avoid buying, especially traditional asset managers with renewed inflows to their funds.
