Hi all- I am just trying to get a better understanding on this. So, this past Thursday, US equity markets rallied after the US Central Bank said they will CONSIDER purchasing high-yield bond ETFs along with non-IG corporate debt. How does directly impact the equity prices? Is it just sense of optimism driving the rally because it shows the Fed may consider buying equity ETFs in the future or something much more technical such as will it lower or stabilize the firm’s overall cost of capital if the fed starts buying their corporate bonds/etfs.
I highly doubt this has anything to do with an expectation of a lowered cost of capital. The Fed cannot purchase non gov’t backed securities by law, so in essence they’re providing liquidity to the treasury to do it for them. Moreover they conveniently provided a cutoff date (don’t remember exactly the date) for the credit quality of the bonds/etfs/funds they’ll be purchasing. In essence, this means if a company is downgraded post cutoff date the fed will be of no assistance. Ford, Delta, and a few other major players likely benefit from this but net-net, it is likely not a boost to the junk market’s credit rating.
Fed/Treasury entering the equity market via etf’s is another story. If they were to purchase direct securities this would be a first (they bought warrants in '09). If they purchase via etf’s or other funds it props equity prices in the short term but that is not sustainable. For now they’re on hold. We’ll see what happens if the near term rally fizzles out.
is there really a law? in any case from what i read. fed is purchasing junk bond etfs. so it is pretty broad based to help everyone.
anyways companies who have a ton of debt. and not much cash coming in have 3 options.
- the debt either needs to reorganized or discounted.
- or they need to raise more bonds/equity in the outside market.
- or they need to ask for grants from the govt.
The fact that the fed is purchasing these distressed assets, means that they will be able to borrow at a cheaper rate.
it’ll provide an exit for junk investors to get out, and let the government tkae the brunt of the hit should it go down. the governemnt can then further provide financing to keep the afloat.
imo this is all a good thing. first we need to help the companies that would have been fine if itwasnt for stupid sharebuybacks, acquisition, and coronavirus. there is no reason for a company to go down because of some self induced government shutdown for a minor pandemic. but companies like cruises, hotels, airlines, were all fine to begin with and employ a lot of people, so they need to be saved.
imo if you are being given a subsidized rate by the government. it should push up your equity prices. though it may signal to the market that you are unhealthy, and push you prices even lower. if someone gives you a million dollars because they think you are poor, would you say no thank you because it signals you are a poor? but then again if someone offered me a dollar. id prolly take it as an insult.
these people who take government debt though imo, should have certain restrictions, like preventing buybacks and dividends or something of that nature.
the government is in a tricky position. if they dont help and the companies files for bankuptcy and start a fire sale. a lot of people get laid off and the govenrment will have to pick up the unemployment tab and hte long term loss of the industry for the country. if they pick up the tab, they run the risk that the company continues to do bad, or does the same bad ■■■■, and they’ll get flack from the public for not giving them restrictions. if they give them a lifeline with restrictions, they might not take it. kind of reminds me of boeing ceo. boeing is us biggest export, the ceo knows this and even though their balance sheet is ■■■■. he can ■■■■ the us govt around and demand for bs grants.
in the small business arena. they are doing business loans that turn to grants when you pay your payroll. there is a lot of room for abuse thtere. you could literally have set the ocmpany up for tax purposess or liability processes and you’ll get free money from the government. its hard to lend companies money and tell them they ahve to keep ■■■■ that is easy to cut. laying people off right now is the right move imo. so with that said i think etfs are the perfect way. as goernment has no say in how ■■■■ is run. and everyone has a cheaper cost of capital. everyone right now need to build a treasure chest. they need to issue debt right now and equity even if the cost is too high and dilute current sahreholder. if you are a a current investor then you are ■■■■ out luck. maybe dont go digging in the trash.
i think anyone who has to taek government help need to have liquidity laws. something like 6 months of worth of cash on hand before they can do anything. and a cap on debt to equity too much bad behavior right now from low rates. we need restrictions. for too long ppl focused on like debt/ebitda. as oppose to looking at the bs structure. debt to ebitda makes sense when things are good, but it hides the underlying balance sheet problems.
Yes, there is a law. The fed is circumventing this via SPV’s - basically loaning money to the treasury who are doing the purchasing. This happened in late March and is truly unprecedented.
On some level I agree with you that the Gov’t should do something to bail out companies as this is truly a “black swan” event. And it will help in the short term, but like I said the credit is only being extended to borrowers/funds who meet a certain credit rating as of the end of March. If you go bottom up in April, you’re out of luck under the current program. There will be blood.
The devilish side of me balks at the entire notion. How quick everybody is to criticize handouts until you’re the one who needs it. That’s a fleeting thought, but still lingers in my mind. Ultimately the feds will bail everybody out as per their mantra, equity prices will reach new all time highs and the interest rates are basically zero forever. Let’s face it, the fix is in. Not to make this political but it should be a wake up call to those my-neighbor-is-dead-to-me folks who live and die by their own sword.
thanks all, I will read both replies in detail and do additional HW before following up.
Table 2 on p23 of the pdf (page 20 of the article) shows “Types of Financial Assets That May be Purchased by the Federal Reserve”
Table 3 on p37 of the pdf (page 34 of the article) shows “Private-Sector Assets Ineligible for Purchase by the Federal Reserve and Those Eligible For Purchase Under Certain Restrictions”
awesome, thank you