Every time something bad happens, somebody wins.
The Federal Reserve efforts to boost economic activity by buying corporate debt is creating a hot market for junk bond sales.
If case you’ve forgotten, junk bonds are offered by less than fully financially secure companies to raise cash. Because the issuer is risky, they pay much higher interest rates than comparable bonds from more financially stable companies. It’s a gamble. If the company goes bankrupt, there’s not guarantee that the buyer gets their money back. However, the high interest rates can make portfolios look good in the short term.
The Fed offering to buy these bonds leaves taxpayers as the ultimate suckers if these companies fail. However, that makes these bonds more salable, and that means money for the traders (the agents who execute buy-and-sell transactions) as noted in the quote below:
Junk issuers have sold $46.7B of bonds so far in June, topping the previous monthly record of $46.4B in September 2013, according to data compiled by Bloomberg. Companies have hurried to build cash war chests due to the coronavirus pandemic, especially after the Fed announced plans to purchase some types of high-yield bonds to boost liquidity. “You get an invitation to a party from the Fed, Treasury and Congress – they offer to pick you up, take you home and bring you breakfast in bed the next morning,” said Bill Zox, a high-yield bond portfolio manager at Diamond Hill Capital Management. “You know it is going to be a party like no other.”Wall Street Breakfast: Trade Spotlight Shifts To Europe
Isn’t it nice to know that some people aren’t sharing your pain?