6 ms·

When a downturn like this happens, the Federal Reserve lowers rates to encourage spending. But at the same time, people are less likely to hold corporate debt a

by arawde 6y ago

When a downturn like this happens, the Federal Reserve lowers rates to encourage spending. But at the same time, people are less likely to hold corporate debt and instead hold cash. People are less likely to hold corporate debt because the corporation has less revenue to service its debt. In the case of a (highly) public company which doesn't have profits, if Uber were to try to sell bonds, the spread over, say, treasuries, would probably be above 8-10%. In other words, corporate debt isn't priced according to lowered rates. It's priced according to what bond investors would need to be paid in order to adequately compensate for the risk of Uber going bankrupt. The only way the Fed would help would be if the Fed bought Uber's bonds, but that would require Uber to be investment grade, which would be laughable, or a "fallen angel", a company which was investment grade before the crisis but has since been downgraded.

chrisco255 6y ago
The Fed is buying junk bonds right now: https://www.bloomberg.com/news/articles/2020-04-09/fed-unleashes-fresh-steps-for-as-much-as-2-3-trillion-in-aid https://www.bloomberg.com/news/articles/2020-04-09/fed-unlea... This underscores the desperate maneuvers the Fed is undertaking to avoid the inevitable. They've killed the free market to save zombies like Uber, which are unprofitable.
- michaelyoshika 6y ago
  Socialism is coming, whether we admit it or not.
  - turingbike 6y ago
    The Fed's policies (at least since 2008) could be described as "socialism for the management upper class" - they got free money that they gave to themselves as bonuses. Their companies were buoyed up, regardless of what the market wanted or whether the business was sound.
  - pstuart 6y ago
    It would be nice if it was shepherded by those that believe in "public good". My hopes are tempered in that regard.
- arawde 6y ago
  From the article (emphasis added) > The Fed said Thursday it will invest up to $2.3 trillion in loans to aid small and mid-sized businesses and state and local governments as well as fund the purchases of some types of high-yield bonds, collateralized loan obligations and commercial mortgage-backed securities. The qualifier is the fallen angels clause which I mentioned. The way this works is that the Fed buys investment-grade ETFs. The underlying indices for those funds still have companies which have been downgraded to junk, which are the falled angels. The Fed isn't going out and purchasing bonds directly in the bond market, they're using existing infrastructure to perform market operations.
  - chrisco255 6y ago
    It's the same difference. It doesn't matter if you buy an ETF or not. You're propping up a broken system and destroying price discovery for the bond market. Price discovery is the pillar of capitalism and efficient markets.
  - JMTQp8lwXL 6y ago
    If an ETF is composed of junk-grade bond debt, should the ETF also be considered junk-grade? How can the ETF remain "investment grade"?
    - trhway 6y ago
      last time the Wall St wizards were able to do that with the junk mortgage bonds. Slice and dice. Junk in, triple-A out. And as far as i see the wizards are still there.
- vsareto 6y ago
  I'm beginning to think they're going to let the Fed "explode" but then we're supposed to go on like nothing ever happened. The mechanics of the explosion are what I wouldn't understand, but it could be as simple as debt forgiveness and businesses just suddenly have to pay a lot less money per month or no one comes to collect. I don't think it's impossible to do financial engineering and hacking to the point where we can ignore an occasional fundamental collapse. Like if I owe money to a mobster, but I somehow kill his entire mob and burn all of his notes, so no one has memory of my obligation. It's just throwing my debt into a black hole and I'm not going to pay a dead guy.
  - abacadaba 6y ago
    Worked* in the bible, every 50 years no work for a year and all debt goes bye bye. Time to bring back the Jubilee?
    - hiram112 6y ago
      Who owned that debt in the bible? It's not all sheiks and kings these days, but instead pension funds and insurance companies. I'm not sure you can just forget the debt without screwing a lot of people in the process. My guess is the Fed will just print the money as that's a lot more politically feasible than the alternative. The only question is if we have to print more than other countries.
      - chrisco255 6y ago
        Yes but printing, too, has tons of risk and could lead to hyperinflation if overdone.
      - abacadaba 6y ago
        Whoever you borrowed from I guess. But also part of it was that if you sold your land during that time you also got it back when all the debt was forgiven. So if needed you could sell it for another 50 year lease at that time. *am not a biblical scholar, feel free to correct
- whatok 6y ago
  The Fed has announced a bunch of facilities but the only one affecting corporates that has made purchases has been the commercial paper facility. The primary and secondary facilities are still weeks off from being active. That's not to say that the announcements haven't had an effect on the market but even the CP facility is barely being used.
nemonemo 6y ago
Thank you. Your number 8-10% was very useful in getting the idea of why the rate change would not affect those unprofitable companies.
whatok 6y ago
>people are less likely to hold corporate debt and instead hold cash. People are less likely to hold corporate debt because the corporation has less revenue to service its debt. This omits part of the investing dynamic and is too simplistic of a conclusion for what's going on right now. There has been sky high investment grade issuance over the past two months and there doesn't seem to be a lack of demand for it. What changes is the price the market demands to hold any asset. There is always a price and that's why companies (cruise and airlines) that are in way worse shape than Uber have been able to raise money both in the debt and equity markets. >if Uber were to try to sell bonds, the spread over, say, treasuries, would probably be above 8-10%. > In other words, corporate debt isn't priced according to lowered rates. These two statements are contradictory. Nothing exists in a vacuum but all else equal, if rates are lower, issuers are usually able to issue for lower all-in yields. Additionally, high yield is a much more idiosyncratic market with way less interest rate sensitivity and new issuance is almost always priced on yield; not spread. > The only way the Fed would help would be if the Fed bought Uber's bonds, but that would require Uber to be investment grade, which would be laughable, or a "fallen angel", a company which was investment grade before the crisis but has since been downgraded. The Fed has already helped Uber as well as other high yield companies through the various facilities it has announced. They are not directly affected by any of them but as with all central bank policies, it creates a reach for yield that flows all the way down.

by arawde 6y ago

chrisco255 6y ago

The Fed is buying junk bonds right now: https://www.bloomberg.com/news/articles/2020-04-09/fed-unleashes-fresh-steps-for-as-much-as-2-3-trillion-in-aid https://www.bloomberg.com/news/articles/2020-04-09/fed-unlea... This underscores the desperate maneuvers the Fed is undertaking to avoid the inevitable. They've killed the free market to save zombies like Uber, which are unprofitable.

michaelyoshika 6y ago
Socialism is coming, whether we admit it or not.
- turingbike 6y ago
  The Fed's policies (at least since 2008) could be described as "socialism for the management upper class" - they got free money that they gave to themselves as bonuses. Their companies were buoyed up, regardless of what the market wanted or whether the business was sound.
- pstuart 6y ago
  It would be nice if it was shepherded by those that believe in "public good". My hopes are tempered in that regard.
arawde 6y ago
From the article (emphasis added) > The Fed said Thursday it will invest up to $2.3 trillion in loans to aid small and mid-sized businesses and state and local governments as well as fund the purchases of some types of high-yield bonds, collateralized loan obligations and commercial mortgage-backed securities. The qualifier is the fallen angels clause which I mentioned. The way this works is that the Fed buys investment-grade ETFs. The underlying indices for those funds still have companies which have been downgraded to junk, which are the falled angels. The Fed isn't going out and purchasing bonds directly in the bond market, they're using existing infrastructure to perform market operations.
- chrisco255 6y ago
  It's the same difference. It doesn't matter if you buy an ETF or not. You're propping up a broken system and destroying price discovery for the bond market. Price discovery is the pillar of capitalism and efficient markets.
- JMTQp8lwXL 6y ago
  If an ETF is composed of junk-grade bond debt, should the ETF also be considered junk-grade? How can the ETF remain "investment grade"?
  - trhway 6y ago
    last time the Wall St wizards were able to do that with the junk mortgage bonds. Slice and dice. Junk in, triple-A out. And as far as i see the wizards are still there.
vsareto 6y ago
I'm beginning to think they're going to let the Fed "explode" but then we're supposed to go on like nothing ever happened. The mechanics of the explosion are what I wouldn't understand, but it could be as simple as debt forgiveness and businesses just suddenly have to pay a lot less money per month or no one comes to collect. I don't think it's impossible to do financial engineering and hacking to the point where we can ignore an occasional fundamental collapse. Like if I owe money to a mobster, but I somehow kill his entire mob and burn all of his notes, so no one has memory of my obligation. It's just throwing my debt into a black hole and I'm not going to pay a dead guy.
- abacadaba 6y ago
  Worked* in the bible, every 50 years no work for a year and all debt goes bye bye. Time to bring back the Jubilee?
  - hiram112 6y ago
    Who owned that debt in the bible? It's not all sheiks and kings these days, but instead pension funds and insurance companies. I'm not sure you can just forget the debt without screwing a lot of people in the process. My guess is the Fed will just print the money as that's a lot more politically feasible than the alternative. The only question is if we have to print more than other countries.
    - chrisco255 6y ago
      Yes but printing, too, has tons of risk and could lead to hyperinflation if overdone.
    - abacadaba 6y ago
      Whoever you borrowed from I guess. But also part of it was that if you sold your land during that time you also got it back when all the debt was forgiven. So if needed you could sell it for another 50 year lease at that time. *am not a biblical scholar, feel free to correct
whatok 6y ago
The Fed has announced a bunch of facilities but the only one affecting corporates that has made purchases has been the commercial paper facility. The primary and secondary facilities are still weeks off from being active. That's not to say that the announcements haven't had an effect on the market but even the CP facility is barely being used.

nemonemo 6y ago

Thank you. Your number 8-10% was very useful in getting the idea of why the rate change would not affect those unprofitable companies.

whatok 6y ago

>people are less likely to hold corporate debt and instead hold cash. People are less likely to hold corporate debt because the corporation has less revenue to service its debt. This omits part of the investing dynamic and is too simplistic of a conclusion for what's going on right now. There has been sky high investment grade issuance over the past two months and there doesn't seem to be a lack of demand for it. What changes is the price the market demands to hold any asset. There is always a price and that's why companies (cruise and airlines) that are in way worse shape than Uber have been able to raise money both in the debt and equity markets. >if Uber were to try to sell bonds, the spread over, say, treasuries, would probably be above 8-10%. > In other words, corporate debt isn't priced according to lowered rates. These two statements are contradictory. Nothing exists in a vacuum but all else equal, if rates are lower, issuers are usually able to issue for lower all-in yields. Additionally, high yield is a much more idiosyncratic market with way less interest rate sensitivity and new issuance is almost always priced on yield; not spread. > The only way the Fed would help would be if the Fed bought Uber's bonds, but that would require Uber to be investment grade, which would be laughable, or a "fallen angel", a company which was investment grade before the crisis but has since been downgraded. The Fed has already helped Uber as well as other high yield companies through the various facilities it has announced. They are not directly affected by any of them but as with all central bank policies, it creates a reach for yield that flows all the way down.