Press "Enter" to skip to content

Bank of America: The Corporate Bond Market Is “Basically Broken”

Investors are divesting from corporate bonds at a record pace. Shares of funds that buy investment-grade debt at a pace not seen since 2008, according to Bank of America. 

Bank of America said March 18 that the Federal Reserve could ease the problems of “the basically broken” market by purchasing corporate bonds, calling such a measure a “small step.” Earlier last week, the Fed announced it would buy commercial paper to support the flow of credit. 

The Fed wouldn’t be able to purchase corporate bonds right away, but an announcement alone would be “very powerful” amid escalating fears over the 

“Some of the decisions the Fed would have to make include what they buy,” the bank’s credit strategists said in the report. “Do they buy like an ETF, i.e. in a market neutrality way?”

The Bank of America strategists said $4.5 trillion of U.S. corporate bonds are eligible for Fed purchases.  “The problem currently is that investors seemingly sell all they have, which includes Treasuries, thus corporate bond prices face a double whammy of wider spreads and higher interest rates,” said the bank. 

As Former Boston Federal Reserve Bank president Eric Rosengren has called on the U.S. central bank to buy corporate bonds to calm any investment-grade corporate debt markets, the limits of such a proposal have come into clear view. The ECB and Bank of England have already embarked upon similar programs. 

The airline industry spent nearly $50 billion in recent years buying back their own stock, and now they are requesting upwards of $200 billion in bailouts to keep Delta, United Airlines, and American above water. 

When the Fed lends money for free or buys assets on the cheap to service debt, the boards of such companies buy their own stock to line the shareholders of the rich. 

Corporate bonds are in meltdown, and a corporate debt bubble bursting, perhaps portending the next depression. 

After the 2008 financial crisis, U.S. corporate debt increased by $2.5 trillion or 40%. That debt binge was a major driver of the stock market bull market of the past 10 years.