Corporate bonds: central banks top up the punch bowl yet again

The corporate bond market continues to deliver unlikely returns, as America’s Federal Reserve stepped in with unprecedented support.

The corporate bond market continues to deliver unlikely returns, writes Tom Howard in The Times. Investors rushed into blue-chip paper during lockdown and have since been richly rewarded. Intel’s $1bn 40-year bond has risen to nearly 145 cents on the dollar since it was sold in March. Another $1.25bn UPS bond is up to 140 cents on the dollar. For these instruments to deliver such large capital gains in such a short time frame is rare indeed.

When markets plunged in March many feared that the overleveraged corporate debt sector would be at the centre of the fallout. But America’s Federal Reserve stepped in with unprecedented support, pledging to buy up to $750bn in corporate bonds. This week the Fed announced its first-ever purchases of individual corporate bonds. It had previously only bought them indirectly, through exchange traded funds (ETFs). The move looks like a “mistake” because bond markets are not stressed and don’t need the extra help, Christopher Whalen of Whalen Global Advisors told Jeff Cox on CNBC. The Fed ought to avoid “diving into this stuff” unnecessarily. The wall of central-bank money has triggered a debt bonanza. US “investment grade” corporate debt issuance this year has eclipsed $1trn and will soon surpass 2019’s overall total, says Joe Rennison in the Financial Times.

The Bank of England has also intervened in corporate bond markets. It plans to buy £10bn of non-financial corporate bonds, taking its total stock of corporate debt up to £20bn. As MoneyWeek went to press the Bank’s Monetary Policy Committee was expected to announce a further £100bn-£150bn increase in its £645bn quantitative easing programme, which mainly buys government gilts. Central bankers will not be taking away the market’s “punch bowl” anytime soon.

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