The Fed (Aka Road Runner) Has Broken The US Bond Market, Leaving Retail Investors (Aka Wile E. Coyote) Hanging In The Air
Summary
- Both the Fed and ECB have 'joined forces' in breaking the USD and EUR bond markets this year.
- Not only that there's no meat left on the bond-bone, but what many investors assume to be a reliable 'backstop' is nothing but thin/empty air.
- EUR negative/USD record low yields aren't only a fiction, but a (imperfect) camouflage to central bankers becoming impotent.
- It's only when the tide goes out that you learn who has been swimming naked. Don't swim naked, and use a life-preserving Wheel!
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'Thanks' to the Fed and ECB, bond investors have very little options when it comes to decent/positive yields.
Over $18 trillion on bonds are trading with negative yields!
And those with positive yields - offers very little.
Surely when it comes to Investment-Grade rated bonds trading with negative yields, even USD-denominated!
However, that's now true even when it comes to high-yield bonds; surely those that are EUR-denominated:
Low rates/yields are pushing companies to raise more and more cash.
As the old saying goes: You issue/raise when you can. not when you need.
Just how record was this year for investment grade and junk bond issuance? Here's how:
As a result, what is called the "credit market" is now completely broken.
Contrary to everything we've ever learned, the longer the duration (i.e. greater the risk) - the lower the return (i.e. YTM reward)
The risk/reward is completely skewed!
Is the Fed still buying corporate bonds? Not really.
After an early burst of buying, during the months of May-July, the Fed has paused and barely purchased corporate bonds ever since.
It looks as if the Fed only had to buy 'enough' (whatever that amount is) to prove investors that they (would) actually backstop it, if and when needed.
We've seen this time and time again. The Fed (aka Road Runner) juices the market, boosts asset prices, and then silently, almost unnoticed, steps away. Retail investors (aka Wile E. Coyote) sustain the boom for a few more months, until one day, the market (i.e. last man standing) suddenly realized that there's no 'floor' underneath.
It's called 'gravity'...
The funny thing is that the "safety net" offered by the Fed is meaningless. I mean, look at what bonds the Fed is buying: Microsoft (MSFT) & Apple (AAPL).
This is anything but 'smoothing market functionality' and fight inequality.
Undoubtedly, 2020 will go down in history as the year with the most (colorful) descriptions/adjectives. Think on how many versions you might use to complete a sentence that starts with "2020 will be remembered as the year ___________________________________________________________"
One of these descriptions is undoubtedly "The year the bond market broke", by no other than its official supervisor/gatekeeper - Jay Powell.
If you think the Fed provides a backstop to restore confidence - this shows what would/could happen if and when Fed officials become impotent.
Most probably, they already have.
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