There's an interesting little report today stating that corporate bond issues are soaring. That's not really my subject, that being about finance not economics, but it's also an interesting proof that the Federal Reserve's policy of quantitative easing did in fact work. Because the aim and point of the whole QE program was to get long term interest rates down so that people would go out and borrow more money. Given that they are out there and borrowing more money we'd have to say that the program to get them to do that worked.
The news itself is here:
The bond market is booming again, a sign of investors’ faith in the resilience of the U.S. economy.
U.S. bond sales by companies with good credit ratings hit $103 billion in October, a record for the month, according to deal tracker Dealogic. Corporate-bond sales in the U.S. are on track for their fourth straight annual record, according to data from the Securities Industry and Financial Markets Association.
OK, that's good, but that's only high grade bonds. What about riskier?
Even some riskier companies are finding strong demand. Payment-technology company
First Data Corp., which carries ratings in the “junk” category, said on Friday that it sold $3.4 billion in bonds with a 7% interest rate, after preparing to sell just $750 million.
Excellent, it's working then. Worth reminding ourselves from earlier in the day what the point and purpose of QE actually was:
In order to understand this we need to understand what QE was and is and the point and purpose of doing it. Central banks know that they have a very large influence upon short term interest rates through things like the Fed rate, BoE rate and so on. They also know that that influence becomes ever more tenuous as we move out along the maturity curve or horizon. Truly long term rates are almost entirely market influenced, those very short term rates are almost entirely central bank influenced.
However, in the depths of the recent recession those same central banks wanted to lower, as much as they could, those long term interest rates. Because we know that low interest rates are monetary stimulus and we thought that we’d like some stimulus to the economy, whether monetary or fiscal. So, what they did was print new money to go out and buy that government debt. Government debt being regarded as zero risk (it isn’t but it’s certainly low risk until you let the likes of Corbyn into power). Buying such government bonds, gilts in the UK, Treasuries in the US, makes the price of those zero risk, government, bonds rise. And obviously, at the same time, the yields on them fall. This means that investors, who rather like being paid interest on the money they’ve lent out, they look for yield, will move out along the risk curve in search of said yield. They buy, perhaps, corporate bonds, thus lowering the interest rates which are payable on such bonds. That is, QE lowers the long term interest rate. That’s what it is supposed to do, what it has done and what we’re thankful for it having done.
The point, purpose and aim of QE was to lower the interest rate at which companies could borrow money so that they would borrow more. Companies are borrowing more money at those lower interest rates: obviously then, it is correct to say that QE worked.
Nice when we finally have a public policy that manages to succeed in doing what it states on the tin, isn't it. Pity it's so rare that we can say this but then there we are, most of the time we are dealing with politicians, not central bankers.
