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On 23 March 2020, the US Federal Reserve (Fed) launched the Secondary Market Corporate Credit Facility (SMCCF) — a special-purpose vehicle (SPV) designed to support the corporate-bond market in the face of the COVID-19 crisis. In late June, the Fed released an official list of its initial bond purchases made via this program.
The more I think about the Fed taking the unprecedented step of buying corporate bonds as part of its crisis-response arsenal, the more I believe it’s difficult to overstate the implications. Here are some of my latest thoughts on the matter.
Five thoughts on the program
In my view, the Fed’s corporate-bond-buying program:
- Minimizes tail funding risk. Many US corporate-bond issuers were distressed and deemed to be at risk of bankruptcy as recently as a few months ago. Then came the Fed’s bond-buying program, which is aimed at removing tail funding risk, primarily for corporates that “should” survive (based on their investment-grade ratings pre-COVID-19). The terms of the program have since been…
By its very nature, the financials sector is a highly macro-exposed area of the equity market. As we have already witnessed over the past several months, what happens on the global macroeconomic front as a result of the COVID-19 crisis will directly impact financial stocks.
The rub, of course, is that no one really knows what will happen from here. Indeed, there is considerable uncertainty around the global macro outlook, with a wide range of potential economic outcomes in play. Financials generally don’t like macro uncertainty, and that’s reflected in the discounted valuations of many such stocks (particularly more balance-sheet-oriented companies like banks and life insurers). In effect, broadly speaking, I believe the sector offers a…
In recent months, the convertible-bond market has provided tremendous opportunity for investors looking to position their portfolios strategically for an eventual recovery from COVID-19. Convertibles have experienced a meaningful uptick in supply during the first half of 2020, including substantially elevated new-issue and secondary-market volumes. Most of this supply surge, which includes a number of notable transactions, has been driven by companies looking to boost liquidity and capital.
So what now? While the market has been engaged with the theme of a rapid recovery in economic activity post-lockdown, helped by an abundance of monetary and fiscal support, there is still potential for significant setbacks to investor confidence and for COVID-related news flow to keep volatility at relatively elevated levels. As the market’s perspective on the likelihood of a fuller, more sustained reopening of the economy continues to evolve, we believe the convertible-bond sector may offer…
Pervasive technological innovations like automation, 5G and artificial intelligence continue to transform nearly every sector of the economy. Mobile payments and digitisation are still rapidly disrupting and democratising the financial sector. Ageing populations and accelerating drug innovation are persistently expanding health care opportunity sets. And with the market’s recent volatility, we think investments in many of today’s most compelling long-term themes are offering historically attractive valuations.
In other words, the future is on sale.
Global investment themes such as these can represent exponential growth opportunities, but they often go underappreciated for extended periods. This is largely due to the difficulty of comprehending and discounting the meaningful changes they can usher in over time. We believe it is vital to look…
As detailed in a “Fed series” penned by my colleagues Amar Reganti and Caroline Casavant — most recently, Corporate credit and monetary financing: A new era in Fed policy — the US Federal Reserve (Fed) has adopted a “whatever it takes” stance to support the ailing US economy amid the ongoing COVID-19 crisis. In broad terms, the extraordinary steps taken by the Fed over the past several weeks include (but are not limited to):
- Conventional monetary easing (i.e., cutting interest rates to the zero lower bound);
- Regulatory guidance designed to encourage banks to continue lending; and
- Large-scale asset purchases, both on and off the Fed’s balance sheet.
While many of the tools the Fed has unveiled harken back to ones used during the global financial crisis, its off-balance sheet purchases go well beyond…