Taps Coogan – August 2nd, 2022

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As the following chart from Bloomberg via Wall Street Silver highlights, junk bond issuance has slowed dramatically this year.

A recent article in the Wall Street Journal noted that July saw just $1.11 billion of new junk bond issuance, “less than half of the previous July low of $2.3 billion from 2007, according to LCD records that go back to 2005.”

The splurge of junk bond issuance over the last couple of years was thanks to record low interest rates for junk borrowers. The tables have now reversed and junk bonds yields have nearly doubled the 2021 lows, even when factoring in the modest drop in yields in July.

While Mr. Powell has stated that he is willing to risk a recession to bring down inflation, the Fed is unlikely to tolerate disorderly credit markets. The shortest path to another Powell pivot is if bond issuance continues to freeze up.

The trillion dollar question is how and when then Fed walks back the very aggressive pace of $95 billion a month of quantitative tightening (QT) that they are ramping up to. Remember, every dollar of QT not only represents a dollar less of the monetary base and thus financial liquidity, it is a dollar of Treasuries or MBSs that the market has to fund by taking a dollar from riskier assets.

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