The Fed buying individual corporate bonds suddenly makes sense

by Unhealing

I made a much smaller post about this in the discussion thread but wanted to ramble a little harder as I’ve thought more about this. So I’ve been loling over the fact that KBE is a limp dick living a life of suffering in contrast to the market, when someone informed me that bank stress test results are coming out later this week. It’s basically a measure intended to prevent a repeat of 2008. Banks are tested on their ability to survive an economic crisis, and if they fail they’re going to take a blow to their valuation and might have to deleverage (which is more or less the goal, to prevent a debt crisis).

Rewind to like a week ago when journalists were saying that “it makes no sense for the Fed to announce that they’re buying individual corporate bonds now, when the bond market is relatively flat/stable” and acting like the move was weird and unnecessary. In the context of an upcoming bank stress test, it makes way too much sense. The amount of leverage vs. capital that a bank carries is a large factor in their ability to pass the stress test. Buying corporate bonds would be a very direct way of decreasing a bank’s reported leverage and increasing their amount of reported cash. It’s not overtly lying, but it’s also a bit scandalous, because it would essentially make banks temporary appear like they’re doing OK for the week so that they can pass the test and not have to consider deleveraging. Even though it’s a terrible economic plan to keep racking up risky corporate debt in the middle of a recession, this is sort of in line with the Fed’s current “kick the can down the road” policy.

It wouldn’t be surprising if this is really what the Fed is doing, but it would be really interesting. It could indicate a number of things:

  1. The banks are heavily leveraged and not prepared to deal with a financial crisis.
  2. The central bank could be showing some signs of weakness in its ability to keep banks liquid, even in spite of its previous efforts and literal bond etf buying.
  3. We’re intentionally racking up a huge deficit simply to hide the deflationary reality of the economy. So the economy is just sucking up whatever money the Fed gives it and needs continual monetary support as economic pressures burn it up. It’s like the Fed is constantly paying hush money to the market to forget about the real economy, lol. This one’s sort of been obvious all along, but it’s still the most pressing issue. Deficit’s cool if it leads to economic growth, but this ostensibly doesn’t.

Or I could just be overthinking it. But this seems to make way more sense than the Fed just deciding for no reason to start buying individual corporate bonds. Even simply the act of them announcing their plan to do this is in itself using up one of their cards, considering the bond market can rally simply off of news of these plans. Deciding to just announce it willy nilly when the bond market is stable makes no sense.

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.