Fed selling of corporate bonds may cause debt issuance 'hiccups': Moody's

Dive Brief:

The Federal Reserve might cause “temporary disruptions” to debt markets as it starts this month to wind down an emergency bond-buying program that it created in March 2020 to ease pandemic-induced turmoil in the corporate debt market, Moody’s Analytics said in a report.
“Entering a market is easier for the Fed than exiting,” Moody’s said, adding “there will be some hiccups along the way, and this lends downside risk to our forecast for both investment-grade and high-yield corporate bond issuance.”
Under the Secondary Market Corporate Credit Facility (SMCCF) “not a lot of the Fed’s corporate bond purchases were high-yield, so the winding down of this facility likely won’t significantly alter valuations; it’s the sentiment aspect,” Moody’s said.

Dive Insight:

The Fed said on June 2 that it will sell $14.2 billion of investment-grade corporate debt and corporate bond ETFs that it began buying in March 2020 to reverse a sudden plunge in credit caused by the onset of COVID-19.

The central bank intends to start gradually selling the ETFs on June 7 and its corporate bonds this summer. It will provide further details later on the timing of the bond sales.

As the Fed exits markets “there could be some temporary disruptions, but we don’t expect anything that would justify a change to our baseline forecast,” Moody’s said.

“It’s much easier to buy than it is to sell without disrupting prices,” Michael Wagner, co-founder of Omnia Family Wealth, told CFO Dive.

The central bank did not announce any changes to its policy of buying $120 billion in Treasury and mortgage bonds each month. Those purchases — aimed at keeping interest rates low and spurring a recovery from the pandemic — have pushed up the Fed’s balance sheet to a record $7.9 trillion.

The Fed “is still not touching its balance sheet,” Wagner said, adding that's "a much bigger ship to turn'' than the phase-out of the $14.2 billion SMCCF.

Issuance of U.S. dollar denominated investment-grade bonds will probably decline this year to $1.28 trillion from just over $2 trillion in 2020, Moody’s said. Before the Fed announced the selling of SMCCF assets, “issuance had already been coming in a little softer than we had anticipated for May, so a revision to the forecast was likely,” it added.

Moody’s predicts the 10-year Treasury yield will rise from about 1.6% today to more than 2% by the end of this year and breach 3% at the end of 2023.

CFOs may want to consider selling debt before rates rise, Wagner said. “The cost of credit is still pretty low and, if we’re looking at it from an historical lens, we may not see rates this low for a long time.”

Still, any debt sales should align with a company’s strategy and balance sheet, he said. “You never want to borrow just for the sake of borrowing.”