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Fixed Income Charts — June 29, 2020

Leverage vs credit spreads: No extra support from the Fed

Chart Highlights

  • Corporate bond purchases by the Federal Reserve have led to both lower credit-risk premia and higher share prices, but leveraged companies have benefitted to only a limited degree so far.
  • In some previous crises — such as the bursting of the dotcom bubble and the Eurozone debt crisis—companies with a larger debt burden did benefit disproportionally from lower borrowing costs. But they did not recover to the same extent in the global financial crisis and the current environment.
  • Although Leverage is not considered a “rewarded” factor—and would thus normally be expected to revert toward its mean—it seems to exhibit significant downside risk in times of severe credit crises. And quantitative easing is not guaranteed to provide any extra support.
  • For more detailed information, see our recent blog post on how Fed bond purchases do little for leveraged firms.

Source: Qontigo