Will the Fed’s Strategy of Buying High Yield ETFs Save the Bond Market?

To help shore up the economy, the Federal Reserve is stepping in to purchase risky assets like high yield bond exchange-traded funds (ETFs). Will this strategy add some stability to the bond markets?

With a number of companies getting downgraded from investment grade to high yield status, the Fed felt it was necessary to step in and extend an olive branch.

“Several important companies in the U.S. were investment grade up until this crisis hit,” said Fed Vice Chair Richard Clarida in a Bloomberg TV interview. “And what we said in our programs if they’ve been downgraded after the date of the crisis they will have access to these new facilities.”

“I think moral hazard in past circumstances, when it’s been associated with financial excesses or private sector excesses, is obviously something to assess and think about, but in this case, this is an entirely exogenous event,” Clarida added. “Businesses aren’t closing and people aren’t unemployed due to any fault of their own. And I think this is a clear as a possible case that those aren’t relevant considerations.”

The move is propping up interest in the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Bloomberg Barclays High Yield Bond ETF (JNK). Some market experts question whether this move is nothing more than a small bandage on a gunshot wound.

“Still, it’s hard to interpret the high-yield ETF inclusion as anything other than taking a flamethrower to the somewhat frozen high-yield market and propping up the price,” wrote Brian Chappatta is a Bloomberg Opinion piece. “Junk-bond spreads tightened the most since 1998 in percentage terms on Thursday, while HYG itself surged 6.6%, the biggest rally since 2008. On Monday, bankers rushed to take advantage of the sudden shift, bringing deals on behalf of Burlington Coat Factory, Cinemark, Ferrellgas, Sabre, and TransDigm.”

“That’s not how healthy markets are supposed to work,” Chappatta added. “Investor appetite for risky debt was already growing organically before the Fed’s artificial intervention, with investors pouring a record $7.1 billion into high-yield funds in the week through April 1 and then another $214 million in the following week.”

Investors contemplating a high yield option can take a look at the Goldman Sachs Access High Yield Corporate Bond ETF (GHYB). GHYB seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the FTSE Goldman Sachs High Yield Corporate Bond Index.

The fund seeks to achieve its investment objective by investing at least 80% of its assets (exclusive of collateral held from securities lending) in securities included in its underlying index. The index is a rules-based index that is designed to measure the performance of high yield corporate bonds denominated in U.S. dollars that meet certain liquidity and fundamental screening criteria.

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