Fed creates monster debt problem
|The US corporate bond yields, as represented by Bloomberg Barclays Average Corporate Bond Yield Index, have declined to a record low of 2.03% despite debt levels as a percentage of gross domestic product soaring to record highs.
This is because the Federal Reserve is buying individual corporate bonds in addition to exchange-traded funds as part of a $250 billion program funded by the CARES Act.
Usually, an uptick in debt levels pushes bond prices lower and yields higher. However, in this case, the Fed has essentially created a backstop to the debt market, which according to some observes, is a cause for concern.
"The Fed has created its own monster. It can't stop buying assets otherwise the whole system will collapse," tweeted Otavio Costa, portfolio manager at Crescat Capital.
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