The Celeri Journal #106: Fed Bond Buying

Written by Michael

On June 29, 2020

Global Markets Recap

The Federal Reserve disclosed the list of 794 companies whose corporate bonds they bought including Apple, Verizon, Toyota (the U.S. division), and drugmaker AbbVie. Central bank skeptics – of which there are many – will ask: do FANG stocks & other household equity names need – or better yet, deserve – what can only be described as a government bailout.

Answer: it’s complicated.

On paper, no doubt, this looks suspect. Apple, in particular, is slowly taking over the world as the stock, like many tech peers, contemplates new all-time highs. 30 million lose their jobs & the printing presses are turned on to ensure a Silicon Valley consumer-products behemoth doesn’t miss its quarterly earnings. Ah, the Fed is apolitical – lest we forget.

The reality is more complex. One bad print on Apple & Verizon bonds might cripple less sturdy firms as debt markets are dominated by relative value traders who arbitrage small price differences across a spectrum of assets. Put another way, plenty of companies whose bonds weren’t bought by the Fed likely benefited by proxy. One of those companies was not oil & gas stalwart Chesapeake Energy, which filed for bankruptcy this weekend. And that’s the point: while the Fed shouldn’t have to pick winners & losers, they’ve hardly been left any other choice.

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