The adventures of Jerome Powell

We have to hand it to The Federal Reserve; what they have managed to do with the investment-grade and high-yield bond and loan market has been remarkable. Back in March, they announced a Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity to frozen markets. They would use this facility to buy investment-grade corporate bonds, high-yield corporate bonds that were investment-grade prior to March 20, 2020, and investment-grade ETFs. The U.S. Treasury provided $25 billion in capital, which meant that the Fed could buy about $250 billion.

From that announcement, investment-grade corporate bonds, (using the MARKIT CDX IG 5-year Index) have tightened 85 basis points, or 56% from their widest. High-yield corporate bonds (using the MARKIT CDX HY 5-year Index) have tightened 443 basis points, or 50% from their widest, and high-yield leveraged loans (using the S&P/LTSA Leveraged Loan Price Index) has increased in price 14 points and is now back to the “Mendoza Line” for that asset class, at $90.

For those who do not follow baseball, Mario Mendoza was a slick-fielding shortstop who played in the Major Leagues in the 1970s. Mario was such a poor hitter, however, that he established the line in batting average futility of .200 and hence, “The Mendoza Line.” Additionally, this melt-up in corporate debt occurred while nearly $1 trillion of new corporate debt was issued!

 

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