Fed Should Draw the Line at Backstopping Junk Bonds
It’s not the central bank’s job to protect every company, or every investor who reached for yield.
The market needs boundaries.
Photographer: Andy Lyons/Getty Images
I’m just going to nip this line of thought in the bud right now: The Federal Reserve should not provide any sort of outright backstop to the U.S. high-yield bond market, no matter how bad things may get for lower-rated companies.
I bring this up not because there’s any reason to believe the central bank is on the brink of enacting such a facility but rather because credit-rating companies are updating their projections of just how many speculative-grade companies might fold because of the economic standstill brought about by the coronavirus outbreak. Moody’s Investors Service released a report on Friday that said a sharp but short-lived downturn would increase the global default rate among junk-rated borrowers to 6.8%. A recession on par with the previous one would mean a 16.1% default rate in a year, and something even worse would bring about a whopping 20.8% rate of failure.