[czinck]

> The Fed is buying assets at a premium (otherwise counterparties wouldn't sell the assets to the Fed)

That's not necessarily true, economic transactions aren't necessarily zero-sum. I would assume for most of the assets being sold to the Fed, the banks need liquid cash more than they need the asset and so would be willing to take a haircut.

>The only way this ends is either a depression the scales of which we've never seen in history before[...], or a hyperinflationary collapse of the U.S. dollar

Why specifically do you think this will happen now when it didn't happen post 2008? Sure the scale so far seems bigger, but also the scale of the hit the "real" economy is taking is much bigger. And, in March, when some of these asset purchases had already started, CPI declined by 0.4%.

[tempsy]

Asset managers are front running the Fed. The Fed hasn’t even bought junk corporate bonds yet. They’ve only signaled that they are willing to do so, which immediately sent the price of junk corporate bond ETFs skyrocketing.

If the Fed steps in to save this market they’ll overpay for debt from companies included in these bond ETFs that will likely go under anyway.

It also creates a moral hazard situation where poor performing companies can raise cheap debt because everyone now thinks the Fed will step in and guarantee it.

[andreilys]

The fed is buying junk corporate bonds that would otherwise plummet in value.

[thomashobohm]

This is not accurate. A "plummet" in value when it comes to the fallen angels that the Fed is purchasing is more like a 10% drop, and even if you treat the difference between the "true" value of the bonds (if the Fed didn't purchase them) and what the Fed pays as a surplus, the aggregate value of all those surpluses is still tiny in the grand scheme of things.

[andreilys]

LQD, a corporate bond ETF, plunged -20%.

It likely would have fallen even further, until the fed decided to intervene and buy corporate bond ETFs.

Now LQD has fully recovered and is back to pre-corona virus levels.

More interesting is the rebound in HYG, another Corp bond ETF, which is 50% BB rating, and the remaining 50% below BB rating. I imagine those will get downgraded and be even worst.

Now what happens when companies can’t meet their debt obligations is that covenants will get triggered and that can mean a whole lot of bad things for corporate debt. Which the federal reserve now holds because nobody else wants it.

[thomashobohm]

Yes, this is a good methodology: we should take the lowest point of a random ETF, extrapolate it out, and use that number in our analysis of the Fed's actions.

edit: they edited their comment extensively after I sent this haha.

[thoughtstheseus]

What covenants? All kidding aside, it’ll still take time for financial reporting to report a full period impact of this.

[DiogenesKynikos]

> That's not necessarily true

The Fed is driving up the price of junk bonds, so it clearly is true.