Pick your yield poison - credit or prepayment risk - Or, look at other risk premia

The US economy is in a recession; nevertheless, corporate bond yields have continued to decline, albeit after a March spike. Corporate BBB spreads are still wider than pre-COVID levels by about 50 bps, but Treasury yields have fallen by 100 bps. Similarly, mortgage rates have also declined although spreads have increased given the uncertainties associated with prepayment optionality. These levels are attractive versus a measure of SPX dividend yield which is hovering around 1.85 percent and being kept low based on strong equity demand. 

These yield declines have been supported by strong Fed intervention. The Fed mortgage portfolio has increased by over $420 billion in the last year to a record $1.93 trillion. All this increase has been since March. The corporate credit facility has grown by $44 billion in a matter of weeks, although this bond buying support is to large borrowers and not small businesses. Currency swaps from the Fed have declined but are still over $100 billion and support rate stability around the globe.

There is a reach for meager yield with limited assessment of  risks. Foremost, what will happen if there is no Fed buying? Are current mortgage, credit, and Treasury rates just being supported by the central bank? My intent by asking the question is not to make a value judgment but to assess stress points for potential risk. A central bank can continue buying for a long-time, but it is important to appreciate the underlying demand for bonds.  

With "economic repression" from COVID policies, there is excess savings available for debt purchases. However, what would happen to corporate bond demand is there was no Fed facility. There is also excess supply as large corporation lever their balance sheets knowing there is a backstop from both Treasury and credit buying. Corporate debt issuance for many countries has eclipsed what was done for all of 2019.

The core issue is that yield risk is not a micro credit problem but a macro policy problem. Hence, risks are greater and more uncertain. While many have double-down on credit exposure, the contrarian view is to look for other forms of risk premia for return.