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The US Federal Reserve is openly buying crap (junk bonds!) and wildly overpaying for it without pretending otherwise. Its balance sheet will have grown by as m

by cs702 7y ago

The US Federal Reserve is openly buying crap (junk bonds!) and wildly overpaying for it without pretending otherwise. Its balance sheet will have grown by as much as an order of magnitude by the end of the month, far above any levels seen during the global financial crisis of 2008. (If you don't know what this means, think of the Fed's liabilities as "all forms of money issuance.") It's issuing fresh money to buy crap from the people who are stuck holding it. The sellers will come out whole, the buyer -- i.e., the US government -- will suffer the losses.[a] Meanwhile, the US Treasury is borrowing and trying to spend on the order of an additional 10% of GDP as quickly as possible, increasing the US federal deficit and borrowings by that much as quickly as possible.[b] And all of this is urgently necessary to prevent economic collapse in the US. Urgently necessary. We are in uncharted waters. [a] You'll see it here: https://fred.stlouisfed.org/series/WALCL https://fred.stlouisfed.org/series/WALCL [b] You'll see it here: https://fred.stlouisfed.org/series/GFDEGDQ188S https://fred.stlouisfed.org/series/GFDEGDQ188S

AngrySkillzz 7y ago
Not "buying crap," we are talking fallen angels AKA companies that were previously rated investment grade that have been downgraded due to the crisis. "... rated at least BBB-/Baa3 as of March 22, 2020 ..." in the press release. It's not like the Fed is buying WeWork bonds, just closing a loophole in the previous investment grade bond buying facility to cover bonds that were recently downgraded. Which is kind of the point, extending credit to otherwise-strong firms that are impacted by the social distancing measures.
- toomuchtodo 7y ago
  You are no longer "otherwise-strong" if you have been impacted by COVID economically. The economy pre-pandemic no longer exists. It will not magically exist again in the future. The Fed buying junk bonds is "extend and pretend". If you want to save the jobs, allow overextended firms to fail, and then bail them out with the government taking ownership (while removing management). We did this with GM in 2008: we saved the jobs, we removed management, and we wiped out existing equity owners.
  - DSingularity 7y ago
    Why it not preventing a “black swan” event from wrecking companies who could have otherwise continued to operate if it wasn’t for the shelter in place response?
    - toomuchtodo 7y ago
      Many companies did prepare and don't need a bailout. If you don't need a bailout, you don't need to give up ownership. Don't devalue a currency because of poor management at scale. Otherwise, you're supporting greed and kleptocracy with monetary policy.
      - imtringued 7y ago
        Ok, let's look at a theoretical business that is designed to survive a pandemic. Well, what is the biggest problem that would affect such a business? Of course, lack of customers! If you don't have customers you also don't need employees. So you can just fire them! Now that we have gotten rid of the first dead weight the next problem is that you still have certain fixed costs. All that real estate is now empty since you fired all your employees. There isn't much you can do except save up money like scrooge McDuck. The easiest way to get that money is by screwing over your employees during good times. Don't give them raises and bonuses. You'll need that money during some government lock down. Now the lockdown is over and your business survived without needing government help. Maybe you have noticed something. The rich managers don't really a give a damn about the lock down. They have a huge amount of money and mostly diversified their net worth away from their own business. $5 million after a 50% stock market crash is still $2.5 million. That might sound like a huge loss but only when you forget to consider that there also exist people that aren't managers and they are in the majority. If you lose your job that is pretty much a 100% reduction in income. If you lose your job you can't just kick out the rest of your family to reduce costs. For every manager that is seeing his portfolio dip there are probably a dozen more non-managers having a worse time. The bank bailouts weren't actually about bailing out banks. The taxpayers were bailing their own money out. Dead banks mean your money is gone. It's like video game servers shutting down. Your stuff is just gone. The managers at the bank probably couldn't care less about their customers losing all their funds.
- billylindeman 7y ago
  "Otherwise Strong" They've been downgraded for a reason (airlines for example) Most of those fallen angels are leveraged to the max because they were borrowing money to finance share repurchasing and in some cases even paying dividends. The moral hazard of this latest move is unconscionable
  - whatok 7y ago
    There's not a single high yield airliner that qualifies for this.
    - cinquemb 7y ago
      Air Canada, ACACN 008911AZ2 US008911AZ26, rated Ba2 qualifies for this since their HY paper is held by HYG. American Airlines Group, AAL 02376RAE2 US02376RAE27, rated B1 qualifies for this since their HY paper is held by HYG. Probably a great time to write malware hack and steal money from these companies listed in IG and HY ETF's since they'll be made whole apparently now no matter what malfeasance they were up to before hand. However, lets keep in mind that since the announcement on March 23, frbny via loans through blackrock has yet to buy any corporate bonds in the secondary market as of April 8th ("Loans" > "Secondary credit") : https://www.federalreserve.gov/releases/h41/current/ https://www.federalreserve.gov/releases/h41/current/
      - whatok 7y ago
        Yes, HYG has some HY airliners but that doesn't make the actual issuers available for any of these facilities. That's the point that I was making.
        cinquemb 7y ago
        Supporting the paper in the secondary market through ETFs, will allow any new issuance to be priced more favorably than if it wasn't at all, even if frbny isn't the one doing the origination (yet, at this rate I think they will eventually along with equity etfs purchases). That's the point I'm making.
- cs702 7y ago
  They're suddenly rated junk because they have become junk -- i.e., no longer as creditworthy. Otherwise I agree: this is urgently necessary.
  - whatok 7y ago
    Right, but there's a massive difference between the broader high yield universe that would definitely see some credit losses pre-Corona vs recently downgraded companies that would likely be okay without this. These facilities were created to triage, not resuscitate.
- phkahler 7y ago
  If they are buying bonds on the open market then it's not helping the companies that issued them, its helping investors. If they are buying newly issued bonds then you can argue its helping the companies.
  - whatok 7y ago
    Buying bonds on the open market absolutely helps companies that issue them because new issues are priced off secondary market. Are you going to buy a new issue bond at 5% yield when a similar secondary bond from the same company is at 10%?
  - missedthecue 7y ago
    Supporting the secondary market allows firms to place new issues, and raise the capital they need to sustain themselves through this. Essentially, you just don't want the market locked up.
- rayuela 7y ago
  They're literally buying JUNK bonds.... https://www.bloomberg.com/news/articles/2020-04-09/fed-unleashes-fresh-steps-for-as-much-as-2-3-trillion-in-aid?srnd=premium https://www.bloomberg.com/news/articles/2020-04-09/fed-unlea...
- A4ET8a8uTh0 7y ago
  The fallen angels is an interesting construct. At the end of the day, their ratings are considered junk. Classifying them as crap is appropriate. Without serious infusion of cash there is a notable nonzero change they would fail. What is the point of those ratings if they are being ignored at the first sign of trouble?
  - ipsum2 7y ago
    > Without serious infusion of cash there is a notable nonzero change they would fail This is an exaggeration. Many companies purposely have junk bonds so they can borrow more money at a low rate, compared to investment grade bonds.
    - A4ET8a8uTh0 7y ago
      Yes. Their purpose is to have funding. Do you think they pay higher interest rates out of the goodness of their hearts? I am not sure what you are arguing here.
    - gruez 7y ago
      >Many companies purposely have junk bonds so they can borrow more money at a low rate, compared to investment grade bonds. What? Conventional wisdom says that risky (junk) bonds would have higher yields (aka costs for the borrower) than safer (investment grade) bonds.
  - elliekelly 7y ago
    Recent history has shown that the ratings are calculated as a function of politics, market psychology, and the rating agency’s best hunch.
  - foota 7y ago
    There's a difference between a company that has always been junk and a company that is only rated junk because of the current crisis?
- cryptica 7y ago
  Every time the Fed does something outrageous and indefensible, you ALWAYS see a bunch of comments and articles like this trying to rationalize it. All the facts are clear as crystal and speak for themselves: - Corporations have kept getting bigger and reinforcing their monopolies far beyond the point of optimum efficiency and have been manipulating elections and policy-making to benefit their own interests. - House prices in big cities have kept going up due to a combination of factors including centralization of capital due to corporate monopoly power. - Many corporations took free 0% loans from the government to buy back their own shares; often for the purpose of tax evasion. This conduct is unethical in at least 3 different ways when you consider the fact that the Fed is now shamelessly bailing out these corporations to clear that same debt which they used for tax evasion. - Freedom of speech in the work environment has declined significantly. - Trust between people has declined to an all time low due to the adverse, coercive work environments in which we operate. - We are facing huge environmental threats which are not addressed due in a large part to lobbyists backed by corporate interests. - The financial system is over-complicated and opaque; few people understand how fiat money enters the system but it's clear from empirical evidence that it benefits corporations while harming both small businesses and consumers. Even the Fed itself has admitted that their cash injections do not reach small businesses or the workers. - Our governments will screw over its citizens in the most blatant way imaginable; they will even exploit a health disaster as an opportunity to fast-track the agendas of their corporate masters. It's bad enough that most people just stand back idly and nod their heads... But it's deeply disturbing to witness some people go further than that and actually manufacture excuses for what are obviously deeply unethical activities... Also, it seems that these people who spread misinformation for the sole benefit of corporations are not even getting paid for it! This behavior is not even aligned with the capitalistic self-interest ideals which their corporate thought leaders keep preaching, it's like some weird type of selective masochistic altruism whereby some individuals feel compelled to only help evil people who they know will hurt them along with the rest of society. If you're a real capitalist, do as you preach and stop defending other richer peoples' interests! That's not how it's supposed to work. If you're not a billionaire yourself and you oppose the idea of the government making laws which will reduce the wealth of billionaires, you're a socialist for the top 0.0001 percent. A maso-socialist.
  - 7y ago
jotto 7y ago
"order of magnitude"? * March 4th assets: 4.2T * Today: 5.8T * Proposed: 2.3T more so that's 3.9T since March 4th. Doubling. Not "order of magnitude"
- gumby 7y ago
  This is a site for computer nerds, and to them doubling is an order of magnitude. (Well at least to the subset who think in binary. For those who prefer hex, even a factor of 10 won’t do it).
  - r00fus 7y ago
    Order of magnitude = 10. Binary order of magnitude = twofold = 2x. Mixing terminology as it suits oneself is considered deceitful and/or manipulative. Making excuses for someone who does this and doesn't restate/recant is also bad form.
    - gumby 7y ago
      https://en.wikipedia.org/wiki/Order_of_magnitude https://en.wikipedia.org/wiki/Order_of_magnitude Although if jocularity in your message whooshed over my head I apologise for that.
- base698 7y ago
  Maybe he was talking rate? 2T seems off the charts if you're talking the normal events, looks like 2008 made it jump 1T to 2T in 2 months. This jumping 2T in 1 week is a little off the charts.
OscarCunningham 7y ago
Isn't the Fed buying at market prices? What makes you think they are overpaying?
- ghouse 7y ago
  Buying at at all increases demand, therefore increases price. Buying at 2.3 T scale increases demand a lot.
  - OscarCunningham 7y ago
    Sellers will still be competing to sell to the Fed, and if the Fed openly announces that it's buying then the market knows that the surge of demand isn't introducing any new information about fundamentals. EDIT: This doesn't mean the price won't rise. The purpose is to cause price rises, i.e. inflation. But they won't be overvalued; the true dollar value will have increased.
    - ghouse 7y ago
      The fed is shifting risk from the free market (which the price is set to balance supply and demand) to the tax payer. > the true dollar value will have increased. The very definition of inflation is to reduce the value of money. Can you help me understand how they're trying to cause inflation, but also increase the "true dollar value"
      - OscarCunningham 7y ago
        I mean the Fed's actions will increase the nominal value of bonds, but this increase will be due to inflation rather than because they're paying more than the rational valuation.
      - aaronblohowiak 7y ago
        Why do you think the tax payer is on the hook? Where do you think the Fed’s money comes from? The fed’s balance sheet impacts people who hold dollars, not people who pay taxes.
samfisher83 7y ago
They did the same thing in 09 and made money.
deanmoriarty 7y ago
Can you or someone else tell me what exactly that means for me? I have my savings in a 401k with a mix of index funds stocks and bonds and to be honest I am quite happy that the government is stepping in and not letting everything go down. I'm sure there is a downside, but can you make it clear what that is? I noticed a lot of HN folks just love to be alarmist when it comes to the economy. I am sure this time you are right, but I've been reading HN comments like yours every single week for almost a decade now, always suggesting that we are on the verge of an impending doom...
- legolas2412 7y ago
  When federal reserve hold interest rates at 0 for 7 years, and pump 4 trillion in the economy via quantative easing to purchase mortgages, it is fair to say that federal reserve is pumping up assets. The impending doom has been pushed in the future, but it will come back much stronger. Sometimes in the future, whrn reckoning comes, usd will lose its reserve currency status, there will be massive currency devaluation/hyperinflation/stagflation.
  - cobookman 7y ago
    And what the Euro will be used? Same issue. How about RNB? Welp its even more manipulated. Nobody knows what the future will hold when everyone is in the same position.
    - fullshark 7y ago
      This is good for bitcoin
  - aaronblohowiak 7y ago
    “Pumping up assets” is aka income inequality, since people who own assets derive part of their income from the increasing value of the asset over time. This also makes it harder to go from a worker to an owner. Yes, pension funds and 401ks own a lot of these assets — but people who have pensions and 401ks are doing better than many many other people in the country.
mrfusion 7y ago
They can always unwind their purchases later. It doesn’t have to be a permanent market disruption.
- tehlike 7y ago
  isn't it almost always permanent though?
  - jonas21 7y ago
    No. For example, TARP was completely unwound after about 6 years (and ended up making a small profit too). > On December 19, 2014, the U.S. Treasury sold its remaining holdings of Ally Financial, essentially ending the program. TARP recovered funds totalling $441.7 billion from $426.4 billion invested, earning a $15.3 billion profit [1] https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program
    - listenallyall 7y ago
      some quick math... 15.3 over 6 years, about 2.5b/yr, off of $426 invested... just a bit over 0.5% ROI. Meanwhile in late 2008, 10 yr notes were yielding about 2.6%. So the "profit" was about 80% less than the risk-free rate. https://www.clevelandfed.org/en/our-research/indicators-and-data/yield-curve-and-gdp-growth/yield-curve-archives/yc-20081217.aspx https://www.clevelandfed.org/en/our-research/indicators-and-...
baq 7y ago
how much money disappeared from the stock market in the past few weeks? i wonder if the numbers that we're talking about match up. there might be little actual printing involved, just using that idle money parked at bank accounts instead of stocks.
- nickff 7y ago
  My read is that velocity of money has decreased (leading to decreases in nominal prices), and they are printing money to increase M2 (sometimes described as the money supply). This will reduce/prevent immediate deflation, but could lead to inflation when the velocity increases again. https://www.investopedia.com/terms/m/m2.asp https://www.investopedia.com/terms/m/m2.asp
base698 7y ago
Is there a list somewhere with all the purchasing going on above the stimulus? It seems from my rather faulty memory we've exceeded the $2 trillion stimulus by a lot.
JumpCrisscross 7y ago
> We are in uncharted waters Yes, we are. But we come with navigational guides. Quantitative easing was born out of Bernanke's deep study of the Great Depression, where exogenous events prompted a liquidity crisis that kept causing pain long after its cause had subsided. The demand destruction we're seeing today, as a result of the novel coronavirus, is unprecedented in the modern era. We don't want to spend decades after the infection has passed rebuilding productive capital destroyed for lack of liquidity. That's what these measures aim to prevent.
- base698 7y ago
  What happens if liquidity still isn't there? Can't see people being comfortable with life as normal at 30% unemployment. Seems like leisure industry will be non existent for at least the next year and that will have further consequences. Navigational guides and models only help in charted territory.
  - oxide 7y ago
    If the liquidity isn't there, the Fed will create money out of nothing and inject liquidity until it is there.
    - chii 7y ago
      loss of liquidity is a loss of confidence by those holding the wealth/capital. I think the FEDs doing these injections will distort the price of money in such a way that risky activities would be seen as less risky, and so spirals into further illiquidity when something bad hits the fan (again), and the FEDs will need to inject again. The businesses failing needs to happen. The capital losses needs to happen. Like a forest fire - new growth can't come if the old capital doesn't die (i.e., those controlling the old capital is constantly being protected from downsides, which this illiquidity represent).
      - millstone 7y ago
        We are not in a period of moderate correction, trimming non-viable deadweight. We are in a mass economic extinction of healthy and successful businesses.
BurningFrog 7y ago
> The sellers will come out whole, the buyer -- i.e., the US government -- will suffer the losses. Isn't the Fed buying with money it prints? If so, it's not the US government that will suffer the losses.
- aaronblohowiak 7y ago
  This misunderstanding gets a lot of people upset. Printing money creates inflationary pressure, yes, but there are a lot of _deflationary_ pressures right now, so if they get it right, things will balance. It also creates moral hazard, though (despite what many people believe) the fed is only buying bonds that were investment grade until just before the fed starting intervening in the system — it will also be buying junk bonds etfs (probably hyg and jnk), but these are better described as high-yield corporate bonds. This more serves to protect the liquidity of ongoing concerns ability to raise debt (necessary for the economic machine to keep running) than it does to put money in the pocket of greedy people (it will — at best — maintain the value of those bonds, and more likely soften the blow.) Disclaimer: recently sold my JNK holdings after fed’s announcement today. Prediction: we will end up with full Japanification and/or MMT.
  - nybble41 7y ago
    > there are a lot of _deflationary_ pressures right now, so if they get it right, things will balance Inflation and deflation are not so one-dimensional that they can simply "balance out". When the Fed issues money that money isn't distributed to everyone equally. And when money gets removed from the economy, that doesn't affect everyone equally either—nor does it impact the same people to whom new money is being distributed. Even if the total money in circulation stays the same, there's still a massive redistribution of wealth going on behind the scenes.
snarf21 7y ago
Agreed, but that is their job. The Fed frequently plays the role of buyer/lender of last resort. They are trying to prevent a collapse and will worry about unwinding later.
vkou 7y ago
> And all of this is urgently necessary to prevent economic collapse in the US. Urgently necessary. The fed buying crap bonds isn't even doing anything to prevent economic collapse. The economy has already collapsed, due to to the shutdowns. This is nothing but a transfer of wealth from people who own US dollars, to people who own US equities. All it does, is prop up the stock market. The real economy could go to zero, but as long as the Fed is buying assets, the stock market will keep looking green.
intuitionist 7y ago
Whoever came up with the name “junk bonds” for high-yield corporate debt was a master of propaganda. The truth is, the bonds the Fed is buying are more like what Ben Graham would call “senior securities with speculative features” (although classically that referred to preferred stock) and really aren’t that different from the BBB-rated bonds they were buying last week. (Indeed, they’re buying bonds that were investment-grade until a couple weeks ago.) These aren’t contingent claims on a company’s assets, like Alphabet stock or a S&P 500 index fund, they’re senior claims, which are structurally and legally less risky than equities, if not actually less risky than every equity security. Personally, it seems to me that if you’re not willing to let capitalism work itself out in a crisis, you should stop pretending to have a capitalist system at all; Norway is a pretty entrepreneurial country despite being a certain shade of pink. But the arbitrary dividing line between “investment grade” bonds and “junk” bonds is not some Platonic boundary between “safe securities” and “crap.” It’s there for complicated historical reasons which are perfectly reasonable to ignore during a crisis caused by an unforeseen and unprecedented economic slowdown.
coliveira 7y ago
The signal the Fed is sending to everyone in the market is: don't worry about risk or bad decisions! As long as you are in the same boat as other financial institutions, the Fed will rescue you. Even if we survive this new crash (I still remember 2008), the economy seems to be headed to destruction in not such a long term.
- ttul 7y ago
  If businesses had to run at all times with the contingent risk of a pandemic built into their cash flow model, virtually no business in the travel, tourism, or entertainment sectors would ever be funded. How would you operate, say, a restaurant with the pandemic risk on your balance sheet? You’d need, what, twelve months of cash available for a rainy day? All of the dynamism of the marketplace would evaporate and we would have Soviet-style restaurants.
  - javagram 7y ago
    You could buy insurance for it. Wimbledon is getting a $140 million payout from their pandemic insurance because they had to cancel. That said, one could also say the taxes businesses pay to the government are like insurance premiums for acts of God and at that point the government can step in...
swsieber 7y ago
> And all of this is urgently necessary to prevent economic collapse in the US. Urgently necessary. There are other options. One such option is to let non-essential businesses stay open and stop it with the travel bans. There'd be other benefits besides preventing economic collapse, delayed or otherwise - less domestic violence, people in Africa won't starve because of other countries are hoarding food (and Africa being a net importer a food will suffer), local farmers won't suffer a severe shortage of transient workers, etc. Do I recommend that? I don't know. I do know there's a big vacuum in the discussions of COVID-19. We are trying to preserve lives, so why don't we ever talk about the deaths extreme isolation measure will cause? If they pale in comparison to the COVID-19 deaths, fine.
- autokad 7y ago
  as soon as I try to talk about it, they attack me (not here, work). All I am saying is a total lockdown is not the only answer, and they act like I am talking about government mandating everyone go out and lick railings
RayVR 7y ago
"buying crap" is a wild exaggeration. The Fed is injecting liquidity into markets where credit ratings are creating second and third order effects that will result in liquidity crunches. To make this clear with an example...many bond funds, active or passive (E.g., ETF, mutual fund, etc.), have strict covenants guiding their investments. In a simplified system of: Investment grade: A, B non-investment grade: C, D the funds may only be able to purchase A and B rated bonds. Additionally, they may be forced to sell a bond which has a rating change from B to C or below. Since many ratings agencies are revising ratings lower across the board, there is mass selling of these bonds, just as the companies attempt to raise money to finance their operations. It's also very typical for ratings agencies to essentially trail the capital markets. So as a bond decreases in value, the probability of a credit rating change increases. This alone could cause manufacturing, energy, or any capital intensive business to fail as their interest payments skyrocket and they lose access to financing. The probability of default for these companies skyrockets in this scenario. If the fed props these markets up temporarily, it's extremely likely the defaults will be far less severe.
deleted 7y ago
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smabie 7y ago
Junk bonds aren't "crap."
deleted 7y ago
[deleted]

by cs702 7y ago

AngrySkillzz 7y ago

Not "buying crap," we are talking fallen angels AKA companies that were previously rated investment grade that have been downgraded due to the crisis. "... rated at least BBB-/Baa3 as of March 22, 2020 ..." in the press release. It's not like the Fed is buying WeWork bonds, just closing a loophole in the previous investment grade bond buying facility to cover bonds that were recently downgraded. Which is kind of the point, extending credit to otherwise-strong firms that are impacted by the social distancing measures.

toomuchtodo 7y ago
You are no longer "otherwise-strong" if you have been impacted by COVID economically. The economy pre-pandemic no longer exists. It will not magically exist again in the future. The Fed buying junk bonds is "extend and pretend". If you want to save the jobs, allow overextended firms to fail, and then bail them out with the government taking ownership (while removing management). We did this with GM in 2008: we saved the jobs, we removed management, and we wiped out existing equity owners.
- DSingularity 7y ago
  Why it not preventing a “black swan” event from wrecking companies who could have otherwise continued to operate if it wasn’t for the shelter in place response?
  - toomuchtodo 7y ago
    Many companies did prepare and don't need a bailout. If you don't need a bailout, you don't need to give up ownership. Don't devalue a currency because of poor management at scale. Otherwise, you're supporting greed and kleptocracy with monetary policy.
    - imtringued 7y ago
      Ok, let's look at a theoretical business that is designed to survive a pandemic. Well, what is the biggest problem that would affect such a business? Of course, lack of customers! If you don't have customers you also don't need employees. So you can just fire them! Now that we have gotten rid of the first dead weight the next problem is that you still have certain fixed costs. All that real estate is now empty since you fired all your employees. There isn't much you can do except save up money like scrooge McDuck. The easiest way to get that money is by screwing over your employees during good times. Don't give them raises and bonuses. You'll need that money during some government lock down. Now the lockdown is over and your business survived without needing government help. Maybe you have noticed something. The rich managers don't really a give a damn about the lock down. They have a huge amount of money and mostly diversified their net worth away from their own business. $5 million after a 50% stock market crash is still $2.5 million. That might sound like a huge loss but only when you forget to consider that there also exist people that aren't managers and they are in the majority. If you lose your job that is pretty much a 100% reduction in income. If you lose your job you can't just kick out the rest of your family to reduce costs. For every manager that is seeing his portfolio dip there are probably a dozen more non-managers having a worse time. The bank bailouts weren't actually about bailing out banks. The taxpayers were bailing their own money out. Dead banks mean your money is gone. It's like video game servers shutting down. Your stuff is just gone. The managers at the bank probably couldn't care less about their customers losing all their funds.
billylindeman 7y ago
"Otherwise Strong" They've been downgraded for a reason (airlines for example) Most of those fallen angels are leveraged to the max because they were borrowing money to finance share repurchasing and in some cases even paying dividends. The moral hazard of this latest move is unconscionable
- whatok 7y ago
  There's not a single high yield airliner that qualifies for this.
  - cinquemb 7y ago
    Air Canada, ACACN 008911AZ2 US008911AZ26, rated Ba2 qualifies for this since their HY paper is held by HYG. American Airlines Group, AAL 02376RAE2 US02376RAE27, rated B1 qualifies for this since their HY paper is held by HYG. Probably a great time to write malware hack and steal money from these companies listed in IG and HY ETF's since they'll be made whole apparently now no matter what malfeasance they were up to before hand. However, lets keep in mind that since the announcement on March 23, frbny via loans through blackrock has yet to buy any corporate bonds in the secondary market as of April 8th ("Loans" > "Secondary credit") : https://www.federalreserve.gov/releases/h41/current/ https://www.federalreserve.gov/releases/h41/current/
    - whatok 7y ago
      Yes, HYG has some HY airliners but that doesn't make the actual issuers available for any of these facilities. That's the point that I was making.
      - cinquemb 7y ago
        Supporting the paper in the secondary market through ETFs, will allow any new issuance to be priced more favorably than if it wasn't at all, even if frbny isn't the one doing the origination (yet, at this rate I think they will eventually along with equity etfs purchases). That's the point I'm making.
cs702 7y ago
They're suddenly rated junk because they have become junk -- i.e., no longer as creditworthy. Otherwise I agree: this is urgently necessary.
- whatok 7y ago
  Right, but there's a massive difference between the broader high yield universe that would definitely see some credit losses pre-Corona vs recently downgraded companies that would likely be okay without this. These facilities were created to triage, not resuscitate.
phkahler 7y ago
If they are buying bonds on the open market then it's not helping the companies that issued them, its helping investors. If they are buying newly issued bonds then you can argue its helping the companies.
- whatok 7y ago
  Buying bonds on the open market absolutely helps companies that issue them because new issues are priced off secondary market. Are you going to buy a new issue bond at 5% yield when a similar secondary bond from the same company is at 10%?
- missedthecue 7y ago
  Supporting the secondary market allows firms to place new issues, and raise the capital they need to sustain themselves through this. Essentially, you just don't want the market locked up.
rayuela 7y ago
They're literally buying JUNK bonds.... https://www.bloomberg.com/news/articles/2020-04-09/fed-unleashes-fresh-steps-for-as-much-as-2-3-trillion-in-aid?srnd=premium https://www.bloomberg.com/news/articles/2020-04-09/fed-unlea...
A4ET8a8uTh0 7y ago
The fallen angels is an interesting construct. At the end of the day, their ratings are considered junk. Classifying them as crap is appropriate. Without serious infusion of cash there is a notable nonzero change they would fail. What is the point of those ratings if they are being ignored at the first sign of trouble?
- ipsum2 7y ago
  > Without serious infusion of cash there is a notable nonzero change they would fail This is an exaggeration. Many companies purposely have junk bonds so they can borrow more money at a low rate, compared to investment grade bonds.
  - A4ET8a8uTh0 7y ago
    Yes. Their purpose is to have funding. Do you think they pay higher interest rates out of the goodness of their hearts? I am not sure what you are arguing here.
  - gruez 7y ago
    >Many companies purposely have junk bonds so they can borrow more money at a low rate, compared to investment grade bonds. What? Conventional wisdom says that risky (junk) bonds would have higher yields (aka costs for the borrower) than safer (investment grade) bonds.
- elliekelly 7y ago
  Recent history has shown that the ratings are calculated as a function of politics, market psychology, and the rating agency’s best hunch.
- foota 7y ago
  There's a difference between a company that has always been junk and a company that is only rated junk because of the current crisis?
cryptica 7y ago
Every time the Fed does something outrageous and indefensible, you ALWAYS see a bunch of comments and articles like this trying to rationalize it. All the facts are clear as crystal and speak for themselves: - Corporations have kept getting bigger and reinforcing their monopolies far beyond the point of optimum efficiency and have been manipulating elections and policy-making to benefit their own interests. - House prices in big cities have kept going up due to a combination of factors including centralization of capital due to corporate monopoly power. - Many corporations took free 0% loans from the government to buy back their own shares; often for the purpose of tax evasion. This conduct is unethical in at least 3 different ways when you consider the fact that the Fed is now shamelessly bailing out these corporations to clear that same debt which they used for tax evasion. - Freedom of speech in the work environment has declined significantly. - Trust between people has declined to an all time low due to the adverse, coercive work environments in which we operate. - We are facing huge environmental threats which are not addressed due in a large part to lobbyists backed by corporate interests. - The financial system is over-complicated and opaque; few people understand how fiat money enters the system but it's clear from empirical evidence that it benefits corporations while harming both small businesses and consumers. Even the Fed itself has admitted that their cash injections do not reach small businesses or the workers. - Our governments will screw over its citizens in the most blatant way imaginable; they will even exploit a health disaster as an opportunity to fast-track the agendas of their corporate masters. It's bad enough that most people just stand back idly and nod their heads... But it's deeply disturbing to witness some people go further than that and actually manufacture excuses for what are obviously deeply unethical activities... Also, it seems that these people who spread misinformation for the sole benefit of corporations are not even getting paid for it! This behavior is not even aligned with the capitalistic self-interest ideals which their corporate thought leaders keep preaching, it's like some weird type of selective masochistic altruism whereby some individuals feel compelled to only help evil people who they know will hurt them along with the rest of society. If you're a real capitalist, do as you preach and stop defending other richer peoples' interests! That's not how it's supposed to work. If you're not a billionaire yourself and you oppose the idea of the government making laws which will reduce the wealth of billionaires, you're a socialist for the top 0.0001 percent. A maso-socialist.
- 7y ago

jotto 7y ago

"order of magnitude"? * March 4th assets: 4.2T * Today: 5.8T * Proposed: 2.3T more so that's 3.9T since March 4th. Doubling. Not "order of magnitude"

gumby 7y ago
This is a site for computer nerds, and to them doubling is an order of magnitude. (Well at least to the subset who think in binary. For those who prefer hex, even a factor of 10 won’t do it).
- r00fus 7y ago
  Order of magnitude = 10. Binary order of magnitude = twofold = 2x. Mixing terminology as it suits oneself is considered deceitful and/or manipulative. Making excuses for someone who does this and doesn't restate/recant is also bad form.
  - gumby 7y ago
    https://en.wikipedia.org/wiki/Order_of_magnitude https://en.wikipedia.org/wiki/Order_of_magnitude Although if jocularity in your message whooshed over my head I apologise for that.
base698 7y ago
Maybe he was talking rate? 2T seems off the charts if you're talking the normal events, looks like 2008 made it jump 1T to 2T in 2 months. This jumping 2T in 1 week is a little off the charts.

OscarCunningham 7y ago

Isn't the Fed buying at market prices? What makes you think they are overpaying?

ghouse 7y ago
Buying at at all increases demand, therefore increases price. Buying at 2.3 T scale increases demand a lot.
- OscarCunningham 7y ago
  Sellers will still be competing to sell to the Fed, and if the Fed openly announces that it's buying then the market knows that the surge of demand isn't introducing any new information about fundamentals. EDIT: This doesn't mean the price won't rise. The purpose is to cause price rises, i.e. inflation. But they won't be overvalued; the true dollar value will have increased.
  - ghouse 7y ago
    The fed is shifting risk from the free market (which the price is set to balance supply and demand) to the tax payer. > the true dollar value will have increased. The very definition of inflation is to reduce the value of money. Can you help me understand how they're trying to cause inflation, but also increase the "true dollar value"
    - OscarCunningham 7y ago
      I mean the Fed's actions will increase the nominal value of bonds, but this increase will be due to inflation rather than because they're paying more than the rational valuation.
    - aaronblohowiak 7y ago
      Why do you think the tax payer is on the hook? Where do you think the Fed’s money comes from? The fed’s balance sheet impacts people who hold dollars, not people who pay taxes.

samfisher83 7y ago

They did the same thing in 09 and made money.

deanmoriarty 7y ago

Can you or someone else tell me what exactly that means for me? I have my savings in a 401k with a mix of index funds stocks and bonds and to be honest I am quite happy that the government is stepping in and not letting everything go down. I'm sure there is a downside, but can you make it clear what that is? I noticed a lot of HN folks just love to be alarmist when it comes to the economy. I am sure this time you are right, but I've been reading HN comments like yours every single week for almost a decade now, always suggesting that we are on the verge of an impending doom...

legolas2412 7y ago
When federal reserve hold interest rates at 0 for 7 years, and pump 4 trillion in the economy via quantative easing to purchase mortgages, it is fair to say that federal reserve is pumping up assets. The impending doom has been pushed in the future, but it will come back much stronger. Sometimes in the future, whrn reckoning comes, usd will lose its reserve currency status, there will be massive currency devaluation/hyperinflation/stagflation.
- cobookman 7y ago
  And what the Euro will be used? Same issue. How about RNB? Welp its even more manipulated. Nobody knows what the future will hold when everyone is in the same position.
  - fullshark 7y ago
    This is good for bitcoin
- aaronblohowiak 7y ago
  “Pumping up assets” is aka income inequality, since people who own assets derive part of their income from the increasing value of the asset over time. This also makes it harder to go from a worker to an owner. Yes, pension funds and 401ks own a lot of these assets — but people who have pensions and 401ks are doing better than many many other people in the country.

mrfusion 7y ago

They can always unwind their purchases later. It doesn’t have to be a permanent market disruption.

tehlike 7y ago
isn't it almost always permanent though?
- jonas21 7y ago
  No. For example, TARP was completely unwound after about 6 years (and ended up making a small profit too). > On December 19, 2014, the U.S. Treasury sold its remaining holdings of Ally Financial, essentially ending the program. TARP recovered funds totalling $441.7 billion from $426.4 billion invested, earning a $15.3 billion profit [1] https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program
  - listenallyall 7y ago
    some quick math... 15.3 over 6 years, about 2.5b/yr, off of $426 invested... just a bit over 0.5% ROI. Meanwhile in late 2008, 10 yr notes were yielding about 2.6%. So the "profit" was about 80% less than the risk-free rate. https://www.clevelandfed.org/en/our-research/indicators-and-data/yield-curve-and-gdp-growth/yield-curve-archives/yc-20081217.aspx https://www.clevelandfed.org/en/our-research/indicators-and-...

baq 7y ago

how much money disappeared from the stock market in the past few weeks? i wonder if the numbers that we're talking about match up. there might be little actual printing involved, just using that idle money parked at bank accounts instead of stocks.

nickff 7y ago
My read is that velocity of money has decreased (leading to decreases in nominal prices), and they are printing money to increase M2 (sometimes described as the money supply). This will reduce/prevent immediate deflation, but could lead to inflation when the velocity increases again. https://www.investopedia.com/terms/m/m2.asp https://www.investopedia.com/terms/m/m2.asp

base698 7y ago

Is there a list somewhere with all the purchasing going on above the stimulus? It seems from my rather faulty memory we've exceeded the $2 trillion stimulus by a lot.

JumpCrisscross 7y ago

> We are in uncharted waters Yes, we are. But we come with navigational guides. Quantitative easing was born out of Bernanke's deep study of the Great Depression, where exogenous events prompted a liquidity crisis that kept causing pain long after its cause had subsided. The demand destruction we're seeing today, as a result of the novel coronavirus, is unprecedented in the modern era. We don't want to spend decades after the infection has passed rebuilding productive capital destroyed for lack of liquidity. That's what these measures aim to prevent.

base698 7y ago
What happens if liquidity still isn't there? Can't see people being comfortable with life as normal at 30% unemployment. Seems like leisure industry will be non existent for at least the next year and that will have further consequences. Navigational guides and models only help in charted territory.
- oxide 7y ago
  If the liquidity isn't there, the Fed will create money out of nothing and inject liquidity until it is there.
  - chii 7y ago
    loss of liquidity is a loss of confidence by those holding the wealth/capital. I think the FEDs doing these injections will distort the price of money in such a way that risky activities would be seen as less risky, and so spirals into further illiquidity when something bad hits the fan (again), and the FEDs will need to inject again. The businesses failing needs to happen. The capital losses needs to happen. Like a forest fire - new growth can't come if the old capital doesn't die (i.e., those controlling the old capital is constantly being protected from downsides, which this illiquidity represent).
    - millstone 7y ago
      We are not in a period of moderate correction, trimming non-viable deadweight. We are in a mass economic extinction of healthy and successful businesses.

BurningFrog 7y ago

> The sellers will come out whole, the buyer -- i.e., the US government -- will suffer the losses. Isn't the Fed buying with money it prints? If so, it's not the US government that will suffer the losses.

aaronblohowiak 7y ago
This misunderstanding gets a lot of people upset. Printing money creates inflationary pressure, yes, but there are a lot of _deflationary_ pressures right now, so if they get it right, things will balance. It also creates moral hazard, though (despite what many people believe) the fed is only buying bonds that were investment grade until just before the fed starting intervening in the system — it will also be buying junk bonds etfs (probably hyg and jnk), but these are better described as high-yield corporate bonds. This more serves to protect the liquidity of ongoing concerns ability to raise debt (necessary for the economic machine to keep running) than it does to put money in the pocket of greedy people (it will — at best — maintain the value of those bonds, and more likely soften the blow.) Disclaimer: recently sold my JNK holdings after fed’s announcement today. Prediction: we will end up with full Japanification and/or MMT.
- nybble41 7y ago
  > there are a lot of _deflationary_ pressures right now, so if they get it right, things will balance Inflation and deflation are not so one-dimensional that they can simply "balance out". When the Fed issues money that money isn't distributed to everyone equally. And when money gets removed from the economy, that doesn't affect everyone equally either—nor does it impact the same people to whom new money is being distributed. Even if the total money in circulation stays the same, there's still a massive redistribution of wealth going on behind the scenes.

snarf21 7y ago

Agreed, but that is their job. The Fed frequently plays the role of buyer/lender of last resort. They are trying to prevent a collapse and will worry about unwinding later.

vkou 7y ago

> And all of this is urgently necessary to prevent economic collapse in the US. Urgently necessary. The fed buying crap bonds isn't even doing anything to prevent economic collapse. The economy has already collapsed, due to to the shutdowns. This is nothing but a transfer of wealth from people who own US dollars, to people who own US equities. All it does, is prop up the stock market. The real economy could go to zero, but as long as the Fed is buying assets, the stock market will keep looking green.

intuitionist 7y ago

Whoever came up with the name “junk bonds” for high-yield corporate debt was a master of propaganda. The truth is, the bonds the Fed is buying are more like what Ben Graham would call “senior securities with speculative features” (although classically that referred to preferred stock) and really aren’t that different from the BBB-rated bonds they were buying last week. (Indeed, they’re buying bonds that were investment-grade until a couple weeks ago.) These aren’t contingent claims on a company’s assets, like Alphabet stock or a S&P 500 index fund, they’re senior claims, which are structurally and legally less risky than equities, if not actually less risky than every equity security. Personally, it seems to me that if you’re not willing to let capitalism work itself out in a crisis, you should stop pretending to have a capitalist system at all; Norway is a pretty entrepreneurial country despite being a certain shade of pink. But the arbitrary dividing line between “investment grade” bonds and “junk” bonds is not some Platonic boundary between “safe securities” and “crap.” It’s there for complicated historical reasons which are perfectly reasonable to ignore during a crisis caused by an unforeseen and unprecedented economic slowdown.

coliveira 7y ago

The signal the Fed is sending to everyone in the market is: don't worry about risk or bad decisions! As long as you are in the same boat as other financial institutions, the Fed will rescue you. Even if we survive this new crash (I still remember 2008), the economy seems to be headed to destruction in not such a long term.

ttul 7y ago
If businesses had to run at all times with the contingent risk of a pandemic built into their cash flow model, virtually no business in the travel, tourism, or entertainment sectors would ever be funded. How would you operate, say, a restaurant with the pandemic risk on your balance sheet? You’d need, what, twelve months of cash available for a rainy day? All of the dynamism of the marketplace would evaporate and we would have Soviet-style restaurants.
- javagram 7y ago
  You could buy insurance for it. Wimbledon is getting a $140 million payout from their pandemic insurance because they had to cancel. That said, one could also say the taxes businesses pay to the government are like insurance premiums for acts of God and at that point the government can step in...

swsieber 7y ago

> And all of this is urgently necessary to prevent economic collapse in the US. Urgently necessary. There are other options. One such option is to let non-essential businesses stay open and stop it with the travel bans. There'd be other benefits besides preventing economic collapse, delayed or otherwise - less domestic violence, people in Africa won't starve because of other countries are hoarding food (and Africa being a net importer a food will suffer), local farmers won't suffer a severe shortage of transient workers, etc. Do I recommend that? I don't know. I do know there's a big vacuum in the discussions of COVID-19. We are trying to preserve lives, so why don't we ever talk about the deaths extreme isolation measure will cause? If they pale in comparison to the COVID-19 deaths, fine.

autokad 7y ago
as soon as I try to talk about it, they attack me (not here, work). All I am saying is a total lockdown is not the only answer, and they act like I am talking about government mandating everyone go out and lick railings

RayVR 7y ago

"buying crap" is a wild exaggeration. The Fed is injecting liquidity into markets where credit ratings are creating second and third order effects that will result in liquidity crunches. To make this clear with an example...many bond funds, active or passive (E.g., ETF, mutual fund, etc.), have strict covenants guiding their investments. In a simplified system of: Investment grade: A, B non-investment grade: C, D the funds may only be able to purchase A and B rated bonds. Additionally, they may be forced to sell a bond which has a rating change from B to C or below. Since many ratings agencies are revising ratings lower across the board, there is mass selling of these bonds, just as the companies attempt to raise money to finance their operations. It's also very typical for ratings agencies to essentially trail the capital markets. So as a bond decreases in value, the probability of a credit rating change increases. This alone could cause manufacturing, energy, or any capital intensive business to fail as their interest payments skyrocket and they lose access to financing. The probability of default for these companies skyrockets in this scenario. If the fed props these markets up temporarily, it's extremely likely the defaults will be far less severe.

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smabie 7y ago

Junk bonds aren't "crap."

deleted 7y ago

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