Fed corporate bond purchase programs announced, now need follow-through

The Fed announced corporate investment grade and high yield bond purchase programs in March and increased their size on April 9th. The programs will include the purchase of bond ETFs. The reaction has been strong and swift. Spreads have tightened, money has flowed into bond ETFs, and corporate bond issuance has been high. Since the March 11 declaration of a pandemic by the WHO, $300 billion of new bonds have been issued or almost 3 times the amount for the same period in 2019.

More information has been provided by the New York Fed, on the corporate purchase programs, see New York Fed Releases Additional Information on Primary Market and Secondary Market Corporate Credit Facilities in Preparation for Series of May Launches, but the plans have not been activated. 

The market has discounted much of the cash flow problems and the significant increase in default probabilities. Defaults will likely be much higher than the GFC, yet spreads have moderated. The current strategy is to take a chance and hope that the Fed will take you out of your troubles. It is a strategy, but it based on the pricing of risk through central bank liquidity and nothing to do with the underlying value of companies. What the Fed gives, the Fed can takeaway.