April 29, 2020 / 10:10 PM / in 3 months

Fed support fuels corporate debt spree in April

NEW YORK, April 29 (Reuters) - Issuance of investment grade corporate debt in April so far has hit $203.4 billion, slightly below March’s record, buoyed by the Federal Reserve’s unprecedented intervention into credit markets to blunt the economic effects of the coronavirus pandemic.

A record-breaking $234.7 billion was issued in March, according to Refinitiv data, as the shutdown of the U.S. economy left many businesses in dire need of cash. The borrowing continued in April, though slowed slightly as companies headed into earnings season.

On Wednesday, Fed Chair Jerome Powell said the central bank’s programs have helped restore confidence in markets and allowed companies to secure more private financing. The remarks were made during a press conference after the bank’s two-day policy meeting, the first since its emergency sessions in March and April.

In an effort to maintain market liquidity, the Fed has pledged to buy investment grade bonds as well as select high-yield bonds and shares in some high-yield bond exchange-traded funds. That is in addition to the more than $1.2 trillion in loans pledged in the Treasury Department’s Payroll Protection Program for small businesses and its Main Street Lending Program for larger companies.

“The reason why U.S. investment grade companies are able to issue at such scale is primarily that the Fed announced plans to buy corporate bonds in the primary and secondary markets. That turned everyone else into a buyer - before the Fed has bought a single bond,” wrote Hans Mikkelsen, head of high grade credit strategy at Bank of America, ahead of Powell’s remarks.

The investment-grade debt market is the chief beneficiary of the Fed’s stimulus efforts, but high-yield debt issuance has risen as well. There have been $33 billion worth of junk bonds issued in April thus far, compared to $3.5 billion in March and $16 billion in April last year, according to Refinitiv IFR and SIFMA data.

The credit market boom may be masking other issues, said Brian Reynolds, chief market strategist at Reynolds Strategy.

“These new flows have not cured the stress on banks’ balance sheets, and they have not cured the stress in the money market.”

Despite the record issuance, money has continued to flow into government money market funds, which may create liquidity problems when investors eventually want to exit those safer investment vehicles, said Reynolds. (Reporting by Kate Duguid; editing by Megan Davies and Tom Brown)

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