Apr 6, 2020 - Economy & Business

Backed by the Fed, bond investors get bullish

Dion Rabouin, author of Markets

Illustration: Sarah Grillo/Axios

The Fed's massive injections of liquidity have reopened much of the bond market, and after back-to-back weeks in which more than $100 billion flowed out of bond funds, investors have regained their bearings and now see opportunity.

What's happening: But after the hemorrhaging outflows relented last week, bulls may now be sticking their heads out a bit too far. Junk bond funds took in more than $7 billion for the week ended April 1, according to Refinitiv Lipper, setting a new weekly record.

  • Junk bond companies have largely been locked out of issuing new debt, but firms with investment-grade ratings have flooded the market with a record $220 billion of new issuance in the last two weeks as the firms desperately seek cash.

Why it's happening: "The Fed came in with its massive bazooka, addressed the liquidity concerns and it’s gone from a buyer’s market to seller’s market," Mike Collins, senior portfolio manager at Prudential's PGIM Fixed Income, tells Axios.

  • "You couldn’t sell a bond before, today you can’t buy a bond."

Yes, but: "While the Fed can have a very direct impact on liquidity… the ability of the Fed to have a major impact on the real economy is very much in question," Mike Swell, co-head of fixed income global portfolio management at Goldman Sachs Asset Management, tells Axios.

  • If the slowdown for businesses lasts just a few months, "you are going to have mid-teens type returns in credit markets ... and it’s a slam dunk," Swell adds.
  • "But if we have global commerce and production stop for nine months to a year, that’s going to be really, really serious for companies that are leveraged."

Flashback: Investors pulled out of bond funds at a record pace during March, data from the Investment Company Institute show.

  • Bond mutual funds and ETFs saw more than $215 billion of outflows during the two weeks ended March 25, surpassing previous record highs by a country mile.

The bottom line: While the Fed has taken unprecedented action, there are significant portions of the bond market where the central bank may not be willing or able to provide funding.

  • "There is a point where investors need to make a decision and have consequences on making risky investments," Tom Simons, money market economist at Jefferies, tells Axios.
  • "If that means defaults on bonds that were already low-rated before [the COVID-19 outbreak] happened, the Fed is likely going to let that happen."

In just the last three weeks, the Fed’s balance sheet has mushroomed by roughly $1.5 trillion and is now close to $1.3 trillion above its previous record high.

  • With its promise of unlimited quantitative easing, investors are expecting the balance sheet to rise much further.

Watch this space: Credit-ratings agencies are beginning to take action and sound the alarm. Moody’s cut its outlook for corporate debt to negative last week, warning of "defaults rising in the coming quarters" and saying there was "no clear turning point yet."

  • S&P Global said it expects a "surge in the corporate speculative-grade default rate to above 10% in the U.S."
  • The last two weeks set a record for the fastest pace of downgrades, Bank of America Global Research pointed out, with net downgrades totaling $560 billion in March.

Go deeper: What's next in the economic battle against coronavirus

Go deeper

Updates: George Floyd protests continue past curfews

Police officers wearing riot gear push back demonstrators outside of the White House on Monday. Photo: Jose Luis Magana/AFP via Getty Images

Protests over the death of George Floyd and other police-related killings of black people continued Tuesday across the U.S. for the eighth consecutive day — prompting a federal response from the National Guard, Immigration and Customs Enforcement and Customs and Border Protection.

The latest: Protesters were still out en masse even as curfews set in Washington, D.C., and New York City. Rep. Alexandria Ocasio-Cortez (D-N.Y.) slammed the New York Police Department late Tuesday following reports of police kettling in protesters on Manhattan Bridge.

Primary elections test impact of protests, coronavirus on voting

Election official at a polling place at McKinley Technology High School in Washington, D.C. Photo: Drew Angerer/Getty Images

In the midst of a global pandemic and national protests over the death of George Floyd, eight states and the District of Columbia held primary elections on Tuesday.

Why it matters: Joe Biden, the presumptive Democratic nominee, needs to win 425 of the 479 delegates up for grabs in order to officially clinch the nomination. There are a number of key down-ballot races throughout the country as well, including a primary in Iowa that could determine the fate of Rep. Steve King (R-Iowa).

Iowa Rep. Steve King defeated in GOP primary

Rep. Steve King. Photo: Alex Wroblewski/Getty Images

State Sen. Randy Feenstra defeated incumbent Rep. Steve King in Tuesday's Republican primary for Iowa's 4th congressional district, according to the Cook Political Report.

Why it matters: King's history of racist remarks has made him one of the most controversial politicians in the country and a pariah within the Republican Party.