Can the Fed 'breed confidence' in fixed income investors?
Last Monday, for the first time in its history, the US Federal Reserve announced a liquidity programme that includes buying corporate debt.
This was followed on Tuesday by the announcement of an unprecedented $2trn-plus package of spending and tax breaks agreed between Republicans and Democrats.
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What will markets make of this? US equity markets certainly responded positively, with the S&P 500 posting its biggest one-day gain since October 2008.
For bond investors, buying corporate bonds is a ground-breaking measure that the Fed did not even implement during the equally tumultuous times of the Global Financial Crisis, and its importance cannot be understated.
As with all stimulus measures, the devil is in the detail. For example, a security's issuer must be rated at least BBB- by a recognised rating agency, it must have a remaining maturity of five years or less, and the issuer must also have material operations in the US.
Importantly, eligible issuers do not include companies that are expected to receive direct financial assistance under pending federal legislation.
Fed chair Jerome Powell has also announced purchases of US Treasuries and certain mortgage-backed securities would be "unlimited", and still more support for the money markets and commercial paper.
Perhaps it was a timely coincidence, but the US investment grade new issue market has seemed to open for business as a result.
This was a positive start to the week for a bond market that has been ravaged with dislocations and volatility of late.
What is yet to be seen is whether this positive initiative by the Fed will continue to breed confidence among the investor base given the unprecedented economic and market conditions.
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Given where yields in credit have got to, if the Fed can indeed restore confidence in an investor base that has been paralysed by uncertainty, then investors who have been scrambling to build up cash in the last couple of weeks could start looking at what we believe will prove to be some of the best buying opportunities over the next decade.
David Norris is head of US credit at TwentyFour Asset Management
Bull Points
• New investment-grade issues could prove some of the best buying opportunities over the next decade
• The US Federal Reserve's purchase of US Treasuries will be unlimited
Bear Points
• The devil will be in the detail in terms of the latest fiscal stimulus
• Bond market has been ravaged with dislocations and volatility lately
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