The Federal Reserve’s $3 trillion bid to stave off an economic crisis in the wake of the coronavirus outbreak is fuelling excesses across U.S. capital markets, Reuters reported. The U.S. central bank has pledged unlimited financial asset purchases to sustain market liquidity, increasing its balance sheet from $4.2 trillion in February to $7 trillion today. While the vast majority of these purchases have been limited to U.S. Treasuries and mortgage-backed securities, the Fed’s pledge to bolster the corporate bond market has been enough to spur a frenzy among investors for bonds and stocks. “COVID-19 is now inversely related to the markets. The worse that COVID-19 gets, the better the markets do because the Fed will bring in stimulus. That is what has been driving markets,” said Andrew Brenner, head of international fixed income at NatAlliance. The Federal Reserve has not bought stocks as part of its financial stimulus programs. But its near-zero interest rates and credit support for large swathes of Corporate America have driven yield-hungry investors back to the equity market. Since their bottom on March 23, the S&P 500 and the Dow Jones Industrial Average have both risen more than 40 percent and the Nasdaq composite has gained nearly 60 percent. The S&P 500’s forward price-to-earnings ratio is currently 21.5, a level last seen during the dot-com boom 20 years ago. The stock market euphoria has also spilled over into initial public offerings (IPOs) and other stock sales to investors. A record $184 billion was raised in U.S. equity capital markets in the second quarter, according to Refinitiv IFR data. Over $8.9 billion worth of IPOs in the second quarter priced above the target range, the highest amount since the third quarter of 2014, according to Dealogic. The Fed’s bond-buying programs have also encouraged companies to tap credit markets and made the second quarter the busiest ever for debt issuance. Some $1.2 trillion of investment-grade paper was sold in the first half of the year, the highest issuance volume recorded by the Securities Industry and Financial Markets Association. Even though the Fed refrained from buying most junk-rated bonds, issuance was at $200 billion through June, more than double last year’s rate.
