Is the Fed Being Sector Neutral?
A Financial Analysis of the US Federal Reserve's Corporate Bond Market Interventions
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See coverage in The Wall Street Journal.
InfluenceMap released Necessary Intervention or Excessive Risk? in June 2020 to examine the US Federal Reserve's COVID-19 related Secondary Market Corporate Credit Facility (SMCCF) activity from a risk viewpoint. It was designed to trigger better disclosure from the Fed and central banks globally as to their strategies during these unprecedented interventions in real economy debt markets. It found long term secular declines in certain sectors in which the Fed was investing (notably Energy, which contains oil/gas and coal value chain companies exclusively) which poses issues of excessive risk-taking by the US government and market distortion. Whether the Fed's corporate bond buying is market neutral and the extent to which it is hedging positions is not clear. However, the sector-weightings of the Fed's purchases can be assessed using financial databases and analysis of the Fed's disclosures. The results are outlined in the download below.
The research finds that the only sector where the Fed is consistently overweight on all three indicators (debt outstanding, equity values and employment) is the GISC Energy sector which contains oil/gas and coal value chain companies exclusively. Against a corporate debt outstanding indictor, it is 2X overweight. Against equity values it is 3.5X overweight and against employment, more than 4X overweight.
The Fed's purchases (as of August, 2020) is thus heavily overweight the Energy sector (containing oil/gas and coal value chain companies exclusively). No other sector exhibits this extent of overweight. The sector benchmarks for Energy - as defined by the S&P 1500 constituents - are 4% for outstanding corporate debt, 2% for market value, and 2% for employment. This indicates that the energy sector is overweight by corporate bonds outstanding by 2 times, employment 4 times, and market value 3.5 times.
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