FED BUYING JUNK BONDS, ETFs IN BID TO REVIVE US ECONOMY

The Federal Reserve is buying junk bonds and corporate debt ETFs as part of its campaign to revive the American economy, Matt Egan wrote for CNN Business on June 16, 2020. Next on its shopping list, according to Scott Minerd, global chief investment officer at Guggenheim Partners, are US stocks.

The S&P 500 has skyrocketed 40% since March 23, when the Fed announced its unprecedented experiment with junk bonds. That surge, coming in the face of the collapse of the real economy, drove up market valuations to dotcom-bubble levels.

“It's a troubling precedent that the Federal Reserve is going to sit there and continue to fund these zombie companies that don't deserve to exist," MInerd said. But Minerd thinks a reckoning is coming, and soon. He expects the S&P 500 will retest its March 23 low of 2,237.40 over the next month, potentially crumbling to as low as 1,600. That would mark a 49% collapse from where the index traded Tuesday during a strong rally.

"There's a point where the Federal Reserve is going to have to pull out a bazooka," Minerd said in an interview. "And I think the option of buying stocks on the part of the Fed is on the table." Should a stock market collapse happen, it would erode confidence among consumers, small businesses and CEOs alike. And it would make it harder for companies to borrow the money they need to survive because of the strong link between stock prices and corporate credit spreads.