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Pam and Russ Martens: How the Fed manipulated junk bonds to help the Dow
By Pam and Russ Martens
Wall Street on Parade
Wednesday, April 29, 2020
Thus far the highly controversial corporate bond buying programs that the Federal Reserve first announced on March 23 have yet to spend a dime according to a spokesperson for the New York Fed, the regional Fed bank that is overseeing almost all of Wall Street’s emergency bailout programs today as well as during the financial crash of 2007 to 2010.
But as the chart posted with this column indicates, just a promise from the Fed to spend billions removing toxic waste from Wall Street’s mega banks is enough to put a bid back in the junk bond market.
... Dispatch continues below ...
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Here's the skinny on how the Fed propped up both the Dow and the junk bond market with its well-timed announcements on March 23 and April 9.
From the close on March 4 to the close on March 23, the junk bond exchange-traded fund (ETF) that goes by the fancy title of “iShares iBoxx High Yield Corporate Bond ETF,” or symbol HYG, lost 21 percent of its value. But that weakness in the junk bond market did even worse damage to the Dow Jones Industrial Average. Over those same trading days the Dow lost 8,498.93 points or a stunning 31 percent of its value in just 14 trading sessions. That had apocalyptic overtones for what lie ahead for the balance of the year.
There are two key reasons for the correlations between the junk bond market and the Dow.
The first is that two of the Wall Street banks that were a regular presence in the Wall Street syndicate that underwrote these junk bond offerings are components of the Dow’s 30 stocks. Those two banks are Goldman Sachs and JPMorgan Chase.
The second key reason is that if Goldman Sachs and JPMorgan Chase are tanking, they will inevitably bring down the share price of every other major Wall Street bank because of their heavy interconnections as derivative counterparties to each other. ...
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