On Monday, the Federal Reserve announced it was expanding its program to get more credit into the hands of large corporations by buying a broad cross-section of investment-grade bonds, part of its pledge to inject $4 trillion into the global financial system to lessen the blow of a pandemic-induced recession.
Why, exactly, the Fed feels it necessary to inject more dollars into the corporate credit market is hard to fathom. The interest rate at which investment-grade companies can borrow on the bond market is now below 4 percent, about as low as anyone can remember. And the pace of bond issuance so far this year, at over $1.2 trillion, has been double that of last year’s torrid pace. Indeed, there’s so much capital sloshing around that investors are lining up to lend money to companies such as Boeing and Macy’s and the cruise-line operator Carnival, although these companies’ revenue has plummeted with along revenue in much of the travel and retail sectors. And this flurry of borrowing and lending comes despite warnings from Standard & Poor’s that the number of companies facing a downgrade in its credit ratings is at an all-time high.
The best explanation for this confidence is the widespread belief on Wall Street that the Fed will do “whatever it takes” — that is, print money to buy as many bonds as necessary — to keep credit flowing to the business sector, no matter the risk. By placing a floor under bond prices, the Fed makes it possible for over-indebted, sales-starved companies to borrow even more to cover operating losses, or refinance existing loans, allowing them to avoid, or at least delay, the day when they cannot pay their bills.
It’s not just creditors, however, who benefit from the Fed’s bond buying — by shielding shareholders from the risk of being wiped out through bankruptcy, their shares are also worth more. And it is that, more than the prospect of a quick recovery or the day-trading of individual investors, that has allowed what had been an overpriced stock market to regain almost all that it lost during the scary early days of the pandemic, despite an unemployment rate that is expected to remain close to double digits for the rest of the year. Things have become so crazy that Hertz stock, which should have become worthless when the company filed for bankruptcy last month, was trading at $6 a share at one point last week. The company has since announced plans to raise $1 billion to pay creditors by issuing new stock.
posted by f.sheikh