Summary

The Fed’s response to the COVID-Crisis has not just been enormous, it has been unprecedented in sixty years of monetary history. Clearly, the public sector’s acquisition of over $1trn of bonds (Fed buying net of issuance) created a huge supply hole in the bond markets that some corporates have sought to fill through issuance of their own, if only to finance further stock buybacks. Meanwhile, retail investors, buoyed with the receipts of both QE and the government’s transfers, have also helped to reflate the equity markets. However, the collapse in yields that the central banks have engineered may be contributing to higher savings rates amongst households, while creating problems for the long-term savings industries. More subtly, notes that the enormous QE has crowded out many US corporates and in particular SMEs from the conventional credit markets, but paradoxically unleashed a tidal wave of liquidity into the Emerging Markets. Indeed, the turn in the EM credit cycles may prove to be the Fed’s undoing as Asia moves towards exporting inflation rather than deflation.

Topics