Fed's Lax Corporate Lending Terms Invite Trouble

During the past few weeks the spreads on corporate bonds relative to Treasuries with comparable maturities have risen sharply. This kind of increase is a natural part of recessions, as investors demand more compensation for the default risks of corporate debt issuers. But a key and unusual part of the government economic response to the pandemic (and the associated recession) has been to make sure that these natural increases in bond spreads are not passed along to corporate borrowers.

Thus, the Federal Reserve stands ready, through its new primary market corporate credit facility, to make attractive loans to investment-grade corporations. These subsidized four-year loans are a bailout of the corporate sector because companies will be able to borrow at interest rates that are not reflective of their true risks.