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This is not accurate. A "plummet" in value when it comes to the fallen angels that the Fed is purchasing is more like a 10% drop, and even if you treat the diff
by thomashobohm 6y ago
This is not accurate. A "plummet" in value when it comes to the fallen angels that the Fed is purchasing is more like a 10% drop, and even if you treat the difference between the "true" value of the bonds (if the Fed didn't purchase them) and what the Fed pays as a surplus, the aggregate value of all those surpluses is still tiny in the grand scheme of things.
- andreilys 6y agoLQD, a corporate bond ETF, plunged -20%. It likely would have fallen even further, until the fed decided to intervene and buy corporate bond ETFs. Now LQD has fully recovered and is back to pre-corona virus levels. More interesting is the rebound in HYG, another Corp bond ETF, which is 50% BB rating, and the remaining 50% below BB rating. I imagine those will get downgraded and be even worst. Now what happens when companies can’t meet their debt obligations is that covenants will get triggered and that can mean a whole lot of bad things for corporate debt. Which the federal reserve now holds because nobody else wants it.
- thomashobohm 6y agoYes, this is a good methodology: we should take the lowest point of a random ETF, extrapolate it out, and use that number in our analysis of the Fed's actions. edit: they edited their comment extensively after I sent this haha.
- thoughtstheseus 6y agoWhat covenants? All kidding aside, it’ll still take time for financial reporting to report a full period impact of this.