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.

Recommended

Nasty surprises in Chinese corporate bonds
Corporate bonds

Nasty surprises in Chinese corporate bonds

Beijing is allowing more state-owned firms to default on their debt, leading to some nasty surprises.
12 Dec 2020
Why an ESG approach is particularly suited to bond investors
Sponsored

Why an ESG approach is particularly suited to bond investors

ESG investing, which focuses on the environmental, social and governance aspects of a business, is all the rage. David C Stevenson explains how bond i…
9 Nov 2020
Why you might want to add emerging market debt to your portfolio
Sponsored

Why you might want to add emerging market debt to your portfolio

David Stevenson explores why, in our world of quantitative easing and negative yields, investors looking for positive yields should look at emerging m…
2 Nov 2020
The topsy-turvy world of bonds
Bonds

The topsy-turvy world of bonds

While stockmarkets rallied over the summer, bond yields continued to send alarm signals.
30 Oct 2020

Most Popular

Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
The world’s fund managers are getting very bullish – be careful out there
Stockmarkets

The world’s fund managers are getting very bullish – be careful out there

The latest survey of fund managers shows them to be extremely bullish on all the same things. And that, says John Stepek, means the market is in dange…
21 Jan 2021
Inflation is the easiest way out of this – just don’t expect politicians to admit it
Inflation

Inflation is the easiest way out of this – just don’t expect politicians to admit it

The UK government borrowed £34.1bn in December, a record amount for that month. Britain's debt pile now amounts to 100% of GDP. How are we going to pa…
22 Jan 2021