Live by central bank liquidity; die by central bank liquidity.
That could well become the mantra for a bond market that, after years of support by the Federal Reserve and its global counterparts, now finds itself suffering under the unintended consequences of the trillions in easing distributed to allay the fears of a market in crisis.
“Liquidity,” in fact, is the word to watchnow in bond trading — ironic, considering that the U.S. central bank’s primary intention has been to boost the flow of cash through financial markets, drive a push toward riskier assets like stocks and corporate credit and thus generate a wealth effect that would spread through the economy.
Indeed, stock prices have soared and high-yield aka junk has been one of the best places to be in fixed income, even if comparable U.S. and global economic growth has been absent. Companies already have issued more than half a trillion dollars in debt during a record 2015, convinced that investors will still have an appetite and rates will stay low.