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Pandemic? What crisis?

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The coronavirus has made fantastical numbers commonplace in the corporate bond market. Everywhere one looks, results are being published that in any other time would herald the sudden collapse of companies. But you wouldn’t guess that from looking at the corporate bond market.

There is growing anecdotal and empirical evidence that Europe’s corporate bond market has stopped worrying about the coronavirus. Syndicate bankers talk of investors not even questioning what course the virus might take when they’re buying deals these days, while order books have been bulging despite reoffer spreads coming close to, or even through, fair value.

This is despite near-universal terrible results coming from the corporate sector and banks taking big loan loss provisions against the financing they have provided to their clients, suggesting they are not expecting all they have lent to return. 

So why are investors apparently so unconcerned? Central banks are to blame, or thank, for that, depending on your perspective.

Since the global financial crisis, central banks have become more intertwined with the real economy. In simpler times they set rules and interest rates for banks to follow. Nowadays, they effectively prop up whole corporations by buying vast amounts of their bonds, keeping rates ultra-low and providing cheap liquidity to lenders. 

There seems to be no limit to what the European Central Bank will shove on its balance sheet. It recently permitted junk-rated corporate debt to be used as repo collateral, which has the market expecting that it will start buying high yield debt soon.

So why would issuers or investors worry about terrible corporate results? Central banks have spent over a decade carrying more and more of the bond market on their shoulders.

Only a fool would bet against them by thinking that matters as trivial as a global pandemic and a deep recession would be enough to wipe out the returns of the consistently lucrative central bank trade. But only a genius would know how we might extricate ourselves from this entanglement.

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