How The Federal Reserve Is Fueling The Junk Bond Boom

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Junk bond investments are on the rise as investors continue to shun the risk that most of them present. The buying spree has come on the back of a challenging market environment that continues to deteriorate in the aftermath of the COVID-19 pandemic. Record low-interest rates have done little to curtail investor sentiments on junk bonds.

Federal Reserve Junk Bond  Support

The unusual development in the bond market comes at the backdrop of the U.S Federal Reserve, seeing away any normal standards of risk around junk bonds. In a bid to calm the markets, the FED has confirmed plans to buy junk bonds a development that continues to avert concerns that the bond market will ever capitulate amid the low-interest rate environment.

Similarly, investors have poured billions of dollars into funds that buy up the debt of companies all rated as junk. Data shows that investors have poured close to $5.7 billion into funds that deal in junk bonds, representing the fourth largest in-flow on record. The junk bond-buying spree has been going on for 10-straight weeks. In return, U.S high yield bonds have gained more than 20% since bottoming in March.

The FED  has already bought $2.5 billion worth of corporate bond and another $7 billion in exchange-traded funds. The buying spree is seen as one of the reasons why investors have continued to shrug off concerns about investments in the bond market.

The FED supporting and allowing the bond market to operate amid the low-interest environment is a development that should continue to strengthen investor sentiments in the space. By doing so, the central bank has allowed companies to enter the debt market and raise money, highly needed to navigate the challenging environment at the back of the COVID-19  pandemic.

Companies in the lowest ends of the credit spectrum have been flocking the debt market, all in the effort of raising money to stay afloat. Investors have continued to invest in junk bonds issued by the belief the FED will bail them out should things go south.

High Yield Issuance

High Yield issuance in the bond market amid record-low interest rates has surged to $238 billion by more than 48% from the same period last year. Affirming strong demand for the riskier assets is the fact spreads, which is the difference between corporate bond yield and treasuries has slid 48 points the past week alone.

While the FED actions were highly needed, given the challenging environment fueled by COVID-19, it has continued to face criticism for its exceptional market support. Economists and other market participants have continued to question how far-out the central bank would be willing to support the junk bond market.

While the FED cannot keep its hands in the markets for long, it’s done all it could to stabilize things after the March market crash. Likewise, it has shown willingness to jump in and calm the market, should things get out of hand.

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