Risky U.S. debt recovers from March lows on stimulus hopes

NEW YORK, April 8 (Reuters) – The riskiest U.S. corporate debt has recovered from March lows on hopes that some speculative-grade companies may be eligible for Treasury loans and on the possibility that the Federal Reserve may ultimately expand its bond-buying program.

While U.S. corporate bond and leveraged loan indexes are still in the red for the year, data from IHS Markit shows that they have recovered significantly from the 2020 lows hit on March 23. Year-to-date returns on the iBoxx USD Liquid Leveraged Loan Index were minus 22.10% on March 23 and had rebounded to minus 10.54% as of April 7.

On the liquid high-yield and investment-grade corporate bond indexes, also run by IHS Markit, year-to-date returns had hit minus 20.98% and minus 13.53% respectively, before rising to minus 12.83% and minus 2.94% as of April 7.

The best performer among these has been investment-grade credit, which had not seen the same degree of losses that riskier indexes had, and has benefited from being the target of the Fed’s corporate bond-buying program. The Treasury Department’s loan program – part of the $2.2 trillion package passed by the U.S. Congress – is also expected to chiefly benefit investment-grade companies.

But companies with junk ratings are still hoping to be included. In its facility to make loans to investment-grade companies through a special purpose vehicle, the Fed said, “The scope of eligible issuers may be expanded in the future.”

The central bank’s March meeting minutes released on Wednesday also made clear its governors were willing to take unprecedented action to stabilize the economy. The reaction was swift as Fed Chair Jerome Powell convened the emergency sessions. Policymakers agreed to slash interest rates back to zero, broaden access to U.S. dollars for foreign central banks and restart the massive asset purchases that have come to define monetary policy in a crisis.

Powell is scheduled to deliver remarks at 10 a.m. ET (1400 GMT) Thursday. Analysts at Citi wrote that Powell might address the possibility of expanding the Fed’s asset purchases to speculative-grade debt.

“Tomorrow’s virtual address from Powell may be a bit more instructive, as he may have some opinion on how the Fed should address moving further out the credit spectrum with their programs. While not great odds, he may also consider yield-curve controls as a viable policy option.”

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