The moral hazard of crisis intervention

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US markets closed up 12% in the shortened pre-Easter week as new coronavirus case growth fell globally and an undercurrent of monetary and fiscal support helped keep sentiment buoyant. Many global markets have now entered ‘bull market’ territory. Nonetheless, European markets remain 20-25% off their 01 January levels, so you’d be forgiven for not feeling overly jubilant.

The US central bank unveiled its latest stimulus plans on Thursday last week with a substantial $2.3trn package to support the economy and financial markets. The major change was an expansion of the scope of asset purchases. When quantitative easing was previously used in the US corporate bond market, it has been exclusively in the investment grade space, but this restriction is being softened. The bank will now buy corporates bonds that were recently investment grade but have now been downgraded to high yield. This will include some of the blockbuster ‘fallen angels’ such as Ford credit, which have had to be absorbed by the far smaller US High Yield index. The Fed will also buy US High Yield ETFs which is another first for a major central bank.

View Full Article – published by Brooks Macdonald on 14th April 2020