There are times when it’s difficult to believe the plain, simple, ignorance of people attempting to comment upon the passing scene. Today’s example is David Dayen at The American Prospect. He comes across a Twitter thread from a group called Americans for Financial Reform. The usual three teenagers in the basement with a mimeograph machine. Well, given their knowledge we’d better hope that’s what they are:
The Fed is buying corporate bonds and it is paying ABOVE PAR for those securities. In fact in the latest data dump (today), it’s buying on average bonds at a price of 107, or 7% more than they are actually worth at face value 2/8 https://t.co/qsD6Q4GRiP
— AFR (@RealBankReform) September 10, 2020
A certain confusion there about what par value means. For those confused, a primer:
What Is Par Value?
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par, depending on factors such as the level of interest rates and the bond’s credit status.
Market value and par value are not the same thing. As an example, the par value on an Apple share is $0.000015 and the market value is $109.00 or so. -ish, you understand. If the Federal Reserve were to go out and buy an Apple share then it would be paying $109.00 – ish, not some fraction of a penny.
Yes, bonds are different but not that different. Interest rates were higher when many/most bonds were issued at $100 par value. So, when interest rates fall they go up in value. To, say, $107. Which is the market price at which the Fed buys them.
At which point David Dayen, that executive editor of The American Prospect, the source essential for teenage mimeograph owners attempting to understand the world:
Americans for Financial Reform ferreted this out in a criminally under-discussed revelation. The Fed reports its corporate bond purchases and loans under the CARES Act to Congress; the most recent one came out September 8. If you go to the trade-level data for bond purchases, you see this very clearly. There’s a par value, a market rate for the bond purchases the Fed is making. It’s paying more than par with virtually every purchase. It bought Altria (the Marlboro and Juul people) bonds at 109.9 percent. It bought Columbia Pipeline group at 116.7 percent. It bought Principal Financial Group at 112 percent. All but a very few of hundreds of purchases totaling tens of billions of dollars are made above par. On average, the price is 107 percent.
Nope, he’s not got the slightest clue either, has he. Even after I alerted him yesterday to this point via Twitter.
And note – Dayen is one of those trying to explain the world to the teenagers with the mimeograph machines. No wonder they’re all entirely at sea, crazed even, on any subject economic. It’s not that they just have a slightly different view of the world, judge by different standards, it’s that they’re gaining their information from the ignorant. Seriously, they don’t make buses short enough to carry those with this level of financial market understanding.
Just questions to make heads explode. If bonds always trade at par value then why do we have a market in them? A market in which we track their prices? Even, a market in which we note that prices do change?