Young Research & Publishing Inc.

Investment Research Since 1978

Disclosure

  • About Us
    • Contributors
    • Archives
    • The Final Richard C. Young’s Intelligence Report
    • You’ve Read The Last Issue of Intelligence Report, Now What?
    • Dick Young’s Research Key: Anecdotal Evidence Gathering
    • Crisis at Vanguard
  • Investment Analysis
    • Bonds
    • Currencies and Gold
    • Dividend Investing
    • ETFs & Funds
    • Investment Strategy
    • Retirement Investing
    • Stocks
    • The Efficient Frontier
  • Investment Counsel
  • Dynamic Maximizers®
  • Retirement Compounders®
  • Free Email Signup
  • Dick Young’s Safe America

Fed Makes a Mockery of Corporate Bond Market

April 15, 2020 By Jeremy Jones, CFA

FOMC Chair Powell answers a reporter’s question at the March 3, 2020 press conference. Photo courtesy of the Federal Reserve.

Howard Marks, the notable distressed debt investor, is out with a memo questioning the Fed’s decision to intervene in credit markets. The Fed panicked when it saw investment-grade bonds sell off a few percentage points last month. It decided to intervene under the auspices of providing liquidity to the market, but liquidity was not the problem. Bond prices were down because there were questions of solvency. Shutting down the economy for an indeterminate time will do that.

There was and is plenty of liquidity in the bond market at the right price. We were an aggressive buyer of corporate bonds during the sell-off, and so was Howard Marks as well as many other investors. There is also close to $2 trillion in dry powder in private equity funds looking for a home. I’m sure some of that would have found its way into the corporate bond market.

The Fed’s intervention was simply a bailout for leveraged investors and overly leveraged companies. Yes, the virus wasn’t their fault, but 9-11 wasn’t any American company’s fault, either, and the financial crisis caused by 9-11 wasn’t the fault of thousands of small businesses that failed during that downturn.

A well-functioning free market requires failure. The over-leveraged and imprudent are supposed to suffer the consequences of their decisions in a downturn. When they get bailed out, the system becomes less stable. The moral hazard created by the Fed’s decision will do much more harm to America than the bailout will do good.

Why worry about risk any longer when the government will be there to bail you out at the first sign of trouble?

As we come out of this crisis, expect more leverage, more risk-taking, and yes, an even bigger bailout during the next downturn.

“Lever up and lobby” has apparently become America’s motto in the 21st century.

Howard Marks has more:

“What’s the Fed’s purpose in buying non-investment grade debt?” Marks, the co-founder of Oaktree Capital Group LLC, wrote in a memo to clients Tuesday. “Does it want to make sure all companies are able to borrow, regardless of their fundamentals? Does it want to protect bondholders from losses, and even mark-to-market declines?”

The way Marks sees it, regulators have taken over the role of the free market, protecting investors and companies from the consequences of their actions when they take on too much leverage.

“Markets work best when participants have a healthy fear of loss,” he wrote. “It shouldn’t be the role of the Fed or the government to eradicate it.”

Share this:

  • Email
  • Twitter
  • Facebook

You Might Also Like:

  • Job Market Booms
  • Bond Bear Market Picking Up Steam
  • Highest Corporate Bond Yields in Five Years
  • Author
  • Recent Posts
Jeremy Jones, CFA
Jeremy Jones, CFA, CFP® is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Richard C. Young & Co., Ltd. was ranked #10 in CNBC's 2019 Financial Advisor Top 100. Jeremy is also a contributing editor of youngresearch.com.
Latest posts by Jeremy Jones, CFA (see all)
  • Prices Are Going Up - April 20, 2021
  • TIPS Not the Best Inflation Hedge Today - April 19, 2021
  • Turkey Bans Bitcoin - April 16, 2021

Search Young Research

Most Popular

  • It’s as Simple as 4%? No, Not Anymore
  • Is Inflation Imminent? Prepare Now
  • Your Port Against a Storm.
  • Vanguard Wellesley (VWINX) vs. Wellington (VWELX): Which Fund is Best?
  • Long Live the Dividend King
  • Inflation? Yes.
  • Fidelity Investments #1: Hires 4,000 Focuses on YOU
  • The Highest Yielding Dow Stocks
  • Banks Prepare for Boom
  • The Power of a Compound Interest Table

Don’t Miss

Default Risk Among the Many Concerns with Annuities

Risk and Reward: An Efficient Frontier

How to be a Billionaire: Proven Strategies from the Titans of Wealth

Could this Be the Vanguard GNMA Winning Edge?

Cryptocosm and Life After Google

Warning: Avoid Mutual Fund Year End Distributions

Is Gold a Good Long-term Investment?

How to Invest in Gold

Vanguard Wellington (VWELX): The Original Balanced Fund

What is the Best Gold ETF for Investing and Trading?

Procter & Gamble (PG) Stock: The Only True Dividend King

The Dividend King of the North

You’ll Love This if You’re Dreaming of an Active Retirement Life

RSS The Latest at Richardcyoung.com

  • Governor DeSantis: Key West’s Voters Need Your Help
  • Florida, Texas, Montana Against COVID Coercion
  • Parents Rage as Woke Schools Shame White Children as Oppressors
  • All Men Recognize the Right of Revolution
  • The Clock is Ticking: You Must Protect Your Family
  • NBA Engaged in ”Endless Social Justice Warrioring”
  • My Battle-Hardened Stock Market Strategy for the Worst of Times
  • Why Black Lives Matter Needs to Be Shut Down
  • Work to Make Money/Invest to Save Money
  • Key West Greetings From the Thirsty Mermaid

About Us

  • About Young Research
  • Archives
  • Contributors

Our Partners

  • Richard C. Young & Co.
  • Richardcyoung.com

Copyright © 2021 | Terms & Conditions

loading Cancel
Post was not sent - check your email addresses!
Email check failed, please try again
Sorry, your blog cannot share posts by email.