The Fed’s corporate bond buying is stoking bubble fears

Jeff Cox@JEFF.COX.7528@JEFFCOXCNBCCOMKEY POINTS

• The Federal Reserve said last week it would start buying individual corporate bonds in addition to ETFs.
• Such intervention has boosted markets but also is stoking fears that risk appetite is getting carried away.
• Companies have issued record-setting amounts of debt during the coronavirus pandemic.
• “If the Fed persists in flooding the markets with liquidity, the risk is that the Fed will create the greatest financial bubble of all times,” market veteran Ed Yardeni said.

Jerome Powell, chairman of the U.S. Federal Reserve, speaks during a House Budget Committee hearing in Washington, D.C., U.S., on Thursday, Nov. 14, 2019.Andrew Harrer | Bloomberg | Getty Images

The Federal Reserve’s move into the next phase of its corporate bond buying is generating renewed concerns over potential asset bubbles.close dialogStream live CNBC TV from around the world.START FREE TRIAL

In the latest leg of its effort to keep markets functioning, the central bank said last week it will expand its purchases of exchange-traded funds into individual issuance of company debt.

While the initial announcement of the program provided a major lift to Wall Street, there now are worries that the risk-on sentiment could be getting carried away.

“The Fed’s shock-and-awe campaign worked amazingly well,” Yardeni Research founder Ed Yardeni said in his daily market note Monday. “This raises the question of whether Fed really needs to do much more.”

Indeed, the mere pronouncement on March 23 that the Fed would establish two credit facilities – one for newly issued bonds and leveraged loans and another for those already on the market and tracked through ETFs – helped assuage a market that had locked up amid cononavirus fears.

The worries are that the market has now gone too far as interest rates linger around record lows and issuers count on perpetual Fed support should buyer appetite wane.

“The goal was to restore liquidity to the credit markets,” Yardeni said. “They are clearly functioning well again. If the Fed persists in flooding the markets with liquidity, the risk is that the Fed will create the greatest financial bubble of all times.”

Rushing to market

Issuance so far already has topped $1 trillion and is likely to come close to doubling the 2019 total even if the pace slows through the rest of the year, according to Citigroup.

That’s come even though the Fed’s actual purchases have been tepid.

Buying so far has totaled just over $7 billion in a $6.7 trillion market. In all, the Fed intends to buy no more than $750 billion in a program that is scheduled to expire in late September.

Still, the boost in total issuance is raising the specter of broader danger should the economic recovery from the coronavirus depths move more slowly than anticipated…..more here

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