Some fans of letting markets work things out are skeptical of the Federal Reserve Board’s new interventions in U.S. asset markets.
Mark Heppenstall, an investment analyst with the asset management arm of The Penn Mutual Life Insurance Co., says the Fed’s decision to start buying investment-grade corporate bonds has clearly helped stabilize the market for corporate bonds.
- A copy of the Penn Mutual corporate credit blog is available here.
- An article about bond market liquidity concerns is available here.
Heppenstall, the chief investment officer at PennMutual Asset Management, talks about the Fed’s new corporate bond purchase program in a commentary posted Thursday.
Life insurers hold trillions of dollars in corporate bonds in their investment portfolios.
The Fed started the bond purchase program in an effort to keep the bond market from freezing up simply because the investors selling corporate bonds have a hard time finding buyers.
Heppenstall contends that, as of March 27, the U.S. corporate bond market was showing signs of extreme stress, and that the Fed move to serve as a bond buyer helped ease the effects of that stress.
The Bond Spread Index and the Bond Default Index
A bond is a security that a company or other issuer uses to borrow money from investors.
A bond issuer pays “interest” to rent money from the lenders.
Shakier borrowers usually have to pay higher interest than safer-looking borrowers pay.
One indicator of bond market health, the investment grade Bloomberg Barclays Corporate Index, is a measure of the “spread,” or gap, between the interest rates that respected corporate borrowers pay on their bonds and the rates that the U.S. government pays on comparable bonds.
The Barclays investment grade corporate bond spread index has bounced between about 100% and 200% most of the time between 2004 and the present.
The corporate bond spread index soared to 600% at the worst point during the 2007-2009 Great Recession.