Can the Federal Reserve Jumpstart the Distressed Debt Markets?
As the Federal Reserve exits the corporate bond market, could a debt market revival be on the horizon?
July 06, 2021 at 10:00 AM
6 minute read
Rewards abound as we slowly emerge from the pandemic. Those with a vaccinated seal of approval can remove their masks outside and even receive a free donut at Krispy Kreme. Fresh air, surviving 2020 and a sugar high—talk about incentives! The Federal Reserve is rewarding the markets with new inventory to trade. While the Federal Reserve may not be handing out free donuts, it is selling its portfolio of investment grade corporate bonds.
On June 2, 2021, the Federal Reserve issued a press release with its plans to "begin winding down the portfolio of the Secondary Market Corporate Credit Facility." This facility was one of many corporate credit facilities the Federal Reserve created during the pandemic. The government stepped in at the right time with an emergency lending facility for newly issued corporate debt and existing corporate debt.
Now is the right time to leave the free market as a free market and sell back the corporate debt that was purchased during an exigent time. The corporate debt market was artificially buoyed with a low interest rate. In turn, less companies defaulted, and the secondary trading markets are slow, if not stifled. The Federal Reserve's actions will strategically infuse the markets with a corporate debt to trade and hopefully revive the debt markets.
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