Junk Bonds Strike Back – FED
Recently Powell announced that the FED would be extending some of its purchasing programmes until 2022. Including the purchasing of riskier assets from corporate bonds to Junk bonds.
Three quarters of a Trillion dollars has been allocated to the purchasing of corporate bonds which is unprecedented. This move has been questioned as Junk bonds are corporate bonds that are high-risk and high-return. They have been rated as not investment grade because those that issues them are not fiscally sound. Junk bonds are also unsecured, and typically are not backed by any assets.
Moreover, how does simply buying corporate bonds help companies? for example:
If Company A has $15Billion in Debt , trading at $10Billion, and its assets are worth $10Billion, it has an equity value of ZERO. If the FED start buying all of company A corporate bonds from investors, how does that help them?. Unless the debt of company A is forgiven, it does not really help a company, and who absorbs that loss ?.