Tags: el erian | fed | junk | bond | zombie | companies

El-Erian: Fed's Junk-Bond Vow Could Create 'Zombie Companies'

By    |   Monday, 04 May 2020 12:40 PM

Investment guru Mohamed El-Erian warns that unprecedented action by the Federal Reserve in response to the coronavirus crisis could lead to “zombie companies.”

“The Fed opened up the high-yield market for almost everybody. That raises the specter of of zombie companies,” the Newsmax Finance Insider and Bloomberg View opinion columnist told CNBC Monday.

“We’ve got to be careful about this because that eats away at what makes America special. That’s the reason why we don’t ever bet against America, because of its dynamism,” the Allianz economic adviser warned CNBC.

“My own sense is the Fed went too far in going into the high yield market, but I understand why they did it,” El-Erian said, noting the extraordinary times. “But on the other hand, you get people who shouldn’t be borrowing raising money.”

Last month, the Fed announced it would expand its corporate bond-buying program to include some speculative-grade debt.

The coronavirus crisis had clobbered corporate credit on concerns that companies would be unable to pay their bills as people stay at home to avoid spreading the virus. All segments of the U.S. market were in the red for the first quarter, according to IHS Markit data, with high-yield and leveraged loans significantly underperforming investment grade, returning minus 12% and minus 11%, respectively.

The United States has the world's highest number of confirmed cases of COVID-19, the respiratory illness caused by the coronavirus, and the Fed has pledged a "whatever-it-takes" approach to keep credit flowing to businesses and households.

Fed Chair Jerome Powell said the central bank would continue to use all the tools at its disposal until the U.S. economy begins to fully rebound. Analysts were especially encouraged by news the Fed would support a broad range of junk debt by purchasing shares of exchange-traded funds (ETFs), Reuters explained.

"The announcement today gave the credit markets an adrenaline shot. It can't stop companies from defaulting, but at least this helps high-yield companies manage borrowing costs while they fight to stay in business," said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management.

The Fed's $2.3 trillion package includes a primary market facility that specifies that companies recently downgraded from investment grade to the first tier of junk - so-called fallen angels - will be eligible for the program.

That includes Ford, whose bond prices rallied and stock jumped 11.3%. Macy's, another recent fallen angel, also saw bond and share prices rally, with the stock up 11.5%.

"The Fed will buy riskier debt and that should keep this V-shaped rebound going a little longer," wrote Edward Moya, senior market analyst and forex trader at OANDA. "Solvency pressure on smaller businesses has been somewhat alleviated now that the Fed signaled they will buy some junk-rated corporate debt."

© 2020 Newsmax Finance. All rights reserved.


   
1Like our page
2Share
StreetTalk
Investment guru Mohamed El-Erian warns that unprecedented action by the Federal Reserve in response to the coronavirus crisis could lead to "zombie companies." "The Fed opened up the high-yield market for almost everybody. That raises the specter of of zombie companies,"...
el erian, fed, junk, bond, zombie, companies
456
2020-40-04
Monday, 04 May 2020 12:40 PM
Newsmax Media, Inc.
 

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved