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Will QE2 Go Corporate?

Interest-Rates / Corporate Bonds Oct 14, 2010 - 08:38 AM GMT

By: Dr_Jeff_Lewis


Our friends on the bond markets have put their money where their mouths are with huge positions made in the past few weeks on short term government debt, demonstrating the likeliness that the Federal Reserve will force quantitative easing round two and buy up billions—maybe trillions—of dollars of debt.

However, some think the second round of quantitative easing will be different.  Instead of purchasing US Treasury bonds or mortgage backed securities, the Fed may instead push to change its charter and buy US corporate debt.  This development has been in the works for quite some time, and the argument has plenty of merit.

Corporate Debt

Unlike the yields of Treasuries and mortgage-backed securities which are extremely low, corporate debt rates are still lofty.  Stressed with indecision and concern about a stable business environment, as well as the allure of high dividends on many top blue chip names, investors have all but abandoned the corporate debt market relative to other fixed income markets.

Unfortunately, the Fed will have some serious political clout in negotiating this deal.  From the top down, from the President to Congress, everyone wants to do something that will help, not hinder business.  One idea that is so frequently tossed around is expanding the credit supply to allow small and medium businesses the ability to borrow money more cheaply to expand, hire new staff, and help rekindle America's economic flame.

Corporate bonds will be first on the radar to increase the credit available to businesses.  Since a huge purchase, likely in the hundreds of billions, will displace a large amount of corporate debt interest, other monies will spill over into small and medium business lending, where the yields are still quite attractive. 

Corporate Investment Will Move Quickly

The collective desire for companies to expand their businesses in the here and now is quite low due to uncertainty.  As such, large corporations are borrowing only as much as they need in the short term and allowing themselves very little room for error when they head to the debt markets.  For every bond that is subscribed and sold, that cash is spent quickly and directly to hire new staff, expand operations, or refinance more expensive debt.

One more issue is that corporate debt purchases will immediately enter into M2.  Whereas purchases of mortgage-backed securities were done at the M0 level and have only slowly trickled into more important monetary categorizations, the newly printed cash that flows to corporations will enter directly into the money supply, not the reserve supply. 

Get Ready!

No matter how the Federal Reserve elects to do QE2, whether via bank reserve level action or at M2 level, the price of bullion will rise quickly to reflect the change in the money supply.  Ahead of the action, silver has amassed an excellent rally through fall which will only continue through QE2 and eventually the 1099 law reform.  If you're not in now, you should be.  This is one party where being fashionably late is not an option.

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of and

    Copyright © 2010 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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