A month on from the announcement of ‘QE infinity’ by the Federal Reserve and capital markets have stabilised and are functioning.

There are still stresses and strains but collectively the central bank and government programs enacted have produced an environment in which companies can refinance. Further measures such as the $2.3 trillion ‘Main St’ package and a commitment to purchasing (supporting) High Yield are evidence that the Fed is completely open ended in what it is prepared to do to prevent a financial crisis unfolding, due to freezing of credit markets. The majority of Fed initiatives have been targeted at credit spreads and have been effective in prompting a strong rally from the wides.

The scale, reach and size of these measures has led to questions of over-stimulation and moral hazard, but in reality the amount of junk bonds bought is likely to be minimal and the sheer size and complexity of funding markets is justification. As we have seen before, the transmission system and effectiveness of asset purchases is inefficient so there is an element of over-engineering needed in the process. Central banks are quite capable of fine tuning, borne out by the Fed already trimming purchases of Treasuries from $30 billion to $15 billion a day.

The Eurozone, despite the ECB’s measures, still sees strains in peripheral debt. The solidarity of its members is certainly being put to the test, not least by whether there should be the collective issuance of debt through some form of ‘corona bond’. The debate over this ignores the already existing structures of the ESM and the EFSF. There is talk of setting up a bad bank to clean up bank balance sheets, a decade late.

Ultimately, the damage caused by COVID-19 and the cost of lockdowns, apparently $25 billion a day in the US and £2 billion a day here in the UK, will depend on length and ability to restart. Fallout will continue to manifest itself in different ways, Crude is the example of the moment (although an ETF owning a quarter of an expiring contract is irresponsible and ignores the most basic rules of commodity futures trading), a production war by the Saudi’s, not exactly winners in the popularity stakes at the moment, in the midst of a demand collapse looks to have been ill judged.

With the primary market open for business, all records have been broken with a flood of issuance, which has been received with no apparent indigestion so far. There have been some monsters from the likes of Oracle and T-Mobile, but even names in desperate situations have issued, with Carnival raising a 3-year at 11.5%. Newly junked Ford raised 10-year debt at 9.65%. The majority has been in $ and then € but we have seen some good quality £ issuance and a recent issue from Tesco, having regained IG status, was10 times oversubscribed.

The Bank of England has been busy too with its measures; increasing the Government’s overdraft, buying 696MM of corporate bonds so far in its APF (again from a puzzling list of issuers), and leaning on UK banks to suspend dividends to conserve firepower, but which also forces income investors to look up their capital structure.

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