Free Markets Are Dead: Fed To Start Buying Junk Bonds, High Yield ETFs

Thursday, April 9, 2020
By Paul Martin

by Tyler Durden
ZeroHedge.com
Thu, 04/09/2020

Back on March 23, when the Fed unveiled it would start buying investment grade corporate bonds, we said “now that the Fed is effectively all in, it will buy stocks and junk bonds next.”

Two weeks later, we were right and this morning the Fed announced it would, as expected, start buying junk bonds (we have to wait for the next “market” – we use the term loosely because it is no longer a market which is terminally disconnected from fundamentals but a giant, Fed-fueled Ponzi scheme – crash before the Fed goes literally all in and starts buying stocks and pretty much anything else).

But let’s back up. A few days ago, we pointed out that the day so many credit bears had been waiting for had arrived, when a record $150BN in investment grade bonds were downgraded to junk, becoming so-called fallen angels, and sparking concerns about what will happen to the $1.3 trillion junk bond market as hundreds of billions of formerly investment grade debt is downgraded to junk and violently reprices the entire high yield space.

Those concerns were answered this morning when as part of the Fed’s expanded $2.3 trillion loan/bailout program, the Fed announced the expansion of its Primary and Secondary Market Corporate Credit Facilities, which will now purchase – drumroll – junk bonds, which were initially investment grade bonds but were downgraded after March 22.

Why March 22? Because Ford was downgraded on March 24, and as a result its bonds are surging.

In the term sheet of the revised term sheet of the Secondary Market Corporate Credit Facility, the Fed now writes that “to qualify as an eligible issuer, the issuer must satisfy the following conditions”

The issuer was rated at least BBB-/Baa3 as of March 22, 2020, by a major nationally recognized statistical rating organization (“NRSRO”). If rated by multiple major NRSROs, the issuer must be rated at least BBB-/Baa3 by two or more NRSROs as of March 22, 2020.

An issuer that was rated at least BBB-/Baa3 as of March 22, 2020, but was subsequently downgraded, must be rated at least BB-/Ba3 as of the date on which the Facility makes a purchase. If rated by multiple major NRSROs, such an issuer must be rated at least BB-/Ba3 by two or more NRSROs at the time the Facility makes a purchase.

The Rest…HERE

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