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The Federal Reserve Is Now Buying Junk

The Federal Reserve added junk bonds to the list of assets it can buy as businesses, particularly small businesses, expect to have trouble surviving the lockdowns and following depression. The Fed announced expansions of its corporate lending programs, which will include below investment grade ETFs of companies.

Gold futures increased $51 on the view that the Fed initiatives could bring about inflation or even hyperinflation.

The Fed announced it would provide $2.3 trillion in programs in order to expand its operations to reach small, mid sized businesses, as well as U.S. cities and states that are missing out on tax revenue. Though, many small businesses are reporting difficulties acquiring their funds.

The Fed previously announced a program to purchase investment-grade corporate debt andn ETFs, including triple-A-rated commercial mortgage-backed securities and collateralized loan obligations as part of its Term Asset-Backed Securities Lending Facility, which was first created during the financial crisis 2008. 

“It would appear this Fed is aware that the economy is in dire straits, particularly with the smaller companies and that they are about to take highly unusual steps, some unprecedented, to see if they can loosen up that sector,” noted Art Cashin, UBS director of floor operations at the New York Stock Exchange.

When it comes to Main Street, the Fed is saying it wants to give $600 billion in loans of $1 million to $25 million for mid sized businesses, as well as term finance to Payroll Protection Program banks, which was authorized by Congress to help small businesses.

The Fed will also create a new Municipal Liquidity Facility offering states and municipalities up to $500 billion in lending, now devoid of tax revenue, which will be backstopped with $35 billion from the Treasury to protect it from potential losses.

“Now outside of buying stocks, every asset class is open for the Fed to buy,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “They’re worried about credit. They consider themselves a lender of  last resort. They’re now the lender of all resorts. Going below investment grade into the high-yield junk area is now a dangerous area they’re headed to, but that’ll be a discussion or another day.”

The Fed claims it will buy “ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds, and the remainder will be in ETFs whose primary investment objective is exposure to U.S. high-yield corporate bonds.”

John Briggs, head of strategy at NatWest, said “it makes you wonder how bad the data is they’re seeing.”

The economy is spiraling for a depression. As Henry Kissinger wrote in Jeff Bezos owned Wall Street Journal that, for what is going on, there is no precedent. Closing the economy will likely destroy the middle class. We will all work at WalMart and Amazon. 

The shutdowns affected 90% of the U.S. economy, with economists predicting Q2 2020 will see a record 30% decline in GDP. With its program to purchase high-yield debt especially helps junk-rated energy companies, struggling with the oil price collapse. 

The Fed has added “massive amounts of liquidity,” according to CNBC. Interest rates are at zero, and the Fed has committed to an unlimited amount of Treasury purchases. Congress authorized a $2.2 trillion aid package, which many expect to be expanded. The Treasury provided $85 billion in protection for three Fed credit facilities that target $850 billion.

When the Fed announced its program to buy corporate debt last month, a record wave of new debt was issued with companies seeking cash to get through the crisis. 

With the Fed balance sheet now at $6 trillion, analysts expect a re-evaluation of risk/reward for all investments, and debt-holders worldwide losing faith in the dollar and  dumping Treasuries.

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