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Macaskill on markets: How to fight the Fed

Investors looking to profit from – and hedge against – credit deterioration due to Covid-19 will need to pick their spots when fighting the Federal Reserve.


An experiment in credit market sponsorship by the US central bank began on May 12 with its first corporate bond exchange-traded fund purchases.

The new world of government support began not with a bang but with a whimper.

Although the Federal Reserve bought $1.8 billion in its first weekly round of support, the effect on markets was muted, as it had already initiated a powerful global rally in credit spreads and spurred record debt issuance with the announcement in March that it would buy corporate bonds in both the primary and secondary markets.


Matt King, Citi

Veteran observers warn that provision of credit liquidity by central banks may simply delay elevated default rates and obscure market pricing signals.

“It has already had a hugely distorting effect on credit spreads,” says Matt King, global head of credit products strategy at Citi. “Investment grade spreads are hundreds of basis points tight and high-yield spreads around 1,000 basis points tight to where you would put them on fundamentals.”

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