NEW YORK (
) -- As investors and economists handicap how the
third round of easing has impacted stocks, housing and the wider economy, some key markets are already seeing a big impact... and they're not the ones Fed officials are likely focused on.
Most notably, a Monday analysis by
shows that the market for the riskiest corporate bonds is rallying to one-year highs as the Fed tries to stimulate economic activity by chasing investors from safe assets and into investments like stocks and real estate, which could help boost a stalling economic recovery.
While Fitch Ratings sees a direct connection between the Fed's newest policies and surging demand for dicey bonds labeled 'junk,' weak overall signals of economic and jobs growth seen in recent data are unlikely to comfort Fed officials as the prepare to discuss monetary policy on October 24.
In a Monday report on debt markets, Fitch Ratings notes that the issuance of the riskiest bonds - loans to corporations with a rating of CCC or lower - has surged to 2012 highs as Fed policies drum up investor appetite for any investments that carry a meaningful yield. "The share of newly minted bonds rated 'CCC' or lower climbed to 26% of total volume ($38.6 billion) -- a record for the year -- as the Federal Reserve's launch of QE3 further stimulated investor appetite for high yield in the primary and secondary markets," writes Fitch Ratings.
The data analyzed by Fitch Ratings would be a signal that the Fed's expansionary policies are working were the central bank concerned that large companies strapped for cash don't have access to financing. However, in unveiling QE3, the Fed had little to say about corporate borrowing and it stressed the program was designed to lower mortgage rates, which could bolster a nascent housing market recovery, and help impart lower unemployment.
In its program, the Fed said on Sept. 13 it would spend $40 billion a month to buy mortgage backed securities and would commit to keeping benchmark interest rates at near zero levels through mid-2015, in an effort to lower unemployment and spur economic growth.
"If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability," the Fed said.
Since the policy was outlined the
S&P 500 Index
is marginally lower and there are few signs outside of corporate debt markets that cheap money has made a big economic impact.
Notably, the Fed's purchase of mortgage bonds is seen as helping to keep mortgage rates at or near record lows. Recent earnings by banking giants like
Bank of America
indicate housing activity and, in particular, refinancing is surging. JPMorgan's Jamie Dimon
in third quarter earnings in Oct. 12.
For now the biggest positive impact of Fed interest rate policies appear to be corporations under stress and in need of financing - or those that are being pursued by private equity investors. Recently,
went from the threat of bankruptcy to a buyout target as it
to meet its cash needs.
Booming debt markets have also helped private equity giants line up
or to alleviate pressures on existing debt saddled investments.
On Monday, private equity giant Permira said it would buy
( ACOM) for $1.6 billion, while media reports also indicated Cerberus Capital Management may buy struggling supermarket chain
Other highly watched prospective private deals include
reports that KKR, TPG and Bain Capital may bid for software maker
and a well publicized campaign by
co-founder Richard Schulze to
the struggling electronics retailer. Both prospective deals hinge on readily available debt financing.
An October Moody's report indicates private equity firms can also use pre-crisis like debt markets to pay themselves giant dividends, seen in big recent announcements made by
Booz Allen Hamilton
, among others.
Still, as Fitch Ratings warns in its Monday report, booming junk debt markets aren't a panacea for cash strapped companies or for the broader economy. Were growth not to return, eventually something has to give.
"The Fed's efforts to revive the economy and a positive resolution to the U.S. fiscal cliff remain critical even as the heightened demand for yield product is allowing more highly levered and vulnerable companies to access the debt markets," writes Fitch. "A more robust economic environment is especially important over the next several years as the liquidity boost from record issuance diminishes," the agency adds.
For more on how Fed policies are causing investors to rethink their 2012 playbook, see why Warren Buffett's Wells Fargo investment
and why bank stocks may face
-- Written by Antoine Gara in New York