Finance
The Fed’s Rescue of Risk-Takers Creates Dangers for the Future
What can the central bank do to stop executives from loading up their balance sheets with debt again?
Jerome Powell, chairman of the U.S. Federal Reserve, during a virtual news conference.
Photographer: Andrew Harrer/BloombergThis article is for subscribers only.
When the coronavirus pandemic reached America’s shores, bond traders knew exactly what to sell first.
In the span of four and a half weeks, from Feb. 19 to March 23, the gap between rates on U.S. Treasuries and corporate bonds rated double-B, or just below investment-grade, spiked to 8.65 percentage points from 1.9 percentage points—a sign investors were demanding higher premiums to take the extra risk. That kind of punitive interest rate, unseen in more than a decade, froze the market for new debt for all but the bravest borrowers at a critical time.