'What the Fed is doing is unprecedented for the United States': Expert

BondCliQ CEO Chris White joins Yahoo Finance’s On The Move to discuss how the Federal Reserve has handled the coronavirus pandemic.

Video Transcript

ADAM SHAPIRO: Welcome back to Yahoo Finance on this Monday, March 30. We're going to talk about bonds right now. And we're going to do that with Chris White, the CEO of BondCliQ.

And I want to bring up something you've pointed out, that downgrades are outpacing upgrades at the two largest credit-rating firms by more than three to one to start this year. And then you get the Fed stepping in with a program to purchase bonds, corporate bonds, which would be eligible for taxpayer-funded stimulus. What does that look like? Because they still have to be investment grade, don't they?

CHRIS WHITE: Well, thanks for having me on. Yeah, what the Fed is doing is unprecedented for the United States. But it's been going on in Europe for quite some time. Ever since the 2008 credit crisis, the ECB and the Bank of England have been buying bonds directly, corporate bonds directly from the marketplace.

At this point in time, the details are pretty light. I think that there-- you have to kind of go back a little bit and understand what's going on with corporate bond market mechanics before you understand the urgency around this unprecedented program. The issue at hand today, and you mentioned it with the downgrades, is that the rung of corporate credit that's being downgraded is actually BBB. And BBB is about 44% of the entire market, and it's one rung above what we would call junk or high-yield.

So getting a B minus on your report card, it's just good enough. But if we start downgrading those BBB-rated bonds, they have to be purged from investment-grade funds. This is what a lot of people are concerned about, and probably why the Fed is stepping in so aggressively and launching a program that they've never launched before.

BRIAN CHEUNG: Hey Chris, it's Brian Cheung here. I've been watching the Fed actions there. But I'm just wondering, what are you seeing in terms of those on the periphery of the actual bond markets themselves? I'm talking about collateralized loan obligations, or even leveraged loans.

What are you seeing in those areas? Those were already areas of kind of pressurized concern before the coronavirus really took full form. But are you seeing the stresses there reflective of, I guess, the inability for a lot of companies to handle the margin pressures from these business stoppages?

CHRIS WHITE: Well, it's an excellent question. And the answer is nobody really knows. We're really missing basic information around pricing and transactions in a lot of the more esoteric fixed-income markets. So being able to measure things like trading volume, or know the actual change in value for particular securities that exist in the structured product area or that exist in the leveraged loan area, it's really guesswork without more structure around the pricing information and the data.

I'm actually hopeful that this entire pandemic, one of the benefits that can come out of it is a real conversation about price transparency and fixed income. Because these markets are so huge that to not know, for example, how to price a bond portfolio at the end of the day is quite dangerous.

JULIE HYMAN: And Chris-- it's Julie here. Nice to see you. To be clear, that is what your business is designed to do, is to increase that transparency. What are you seeing specifically on your platform right now?

Are you seeing people come there to try to get this information you're talking about? Have you seen an uptick in interest as all of this has been going on?

CHRIS WHITE: Well, it's a great question. What we've actually seen has been quite concerning from a market standpoint. We are getting quotes directly from the dealers and organizing them onto our platform BondCliQ. Those quotes are normally just going out to the customers. What we've seen is a massive decline in the amount of quotes being made, the amount of prices being made to customers.

So in a time when customers need up-to-date pricing information, all of the data in the entire market is sort of going sour. What we're hoping with our initiative is that by structuring the data little bit differently, and that's literally just allowing everybody to see that pricing information at the same time, that we can bring confidence back into the market, and that people can make decisions having the pricing information that can answer Brian's question, which is what's actually happening in the marketplace.

So we've seen these wild swings occurring in credit without really knowing particularly what has happened, except the value of the bond yesterday was 99, and today it's 81.

ADAM SHAPIRO: Well, I'm curious. For those who don't follow the bond market on a daily basis, could the Fed, because of this extraordinary step, wind up holding bonds that not too long from now could essentially be-- I don't want to say worthless, but worth at least less than what they purchased?

CHRIS WHITE: Absolutely. But one of the provisions in the Fed's program-- and let's be clear here, this is a taxpayer-funded stimulus package. And so I think that once you start bringing taxpayer money into the corporate bond market to support it, we need to start talking about things like price transparency, because we want to make sure that the taxpayer is being treated properly as an investing interest.

But the Fed has said that they're only going to be buying bonds that have a maturity of five years or less. So I think they're doing that, Adam, to make sure that they're not buying bonds that could potentially default. Because with that time horizon, we're hoping that companies are able to stay solvent for a period long enough to pay off their debts. And I think that's-- it's actually pretty shrewd by the Fed to keep their support in that area, so that they don't take on massive losses.

But I think something that we need to discuss as an industry, because we've seen something like this before-- if you remember in 2008, to support the residential mortgage-backed market, the TARP program was put into place to directly buy bonds in that area of fixed income. And what we saw in a market that's very similar to corporate bonds, where you don't have price transparency, and really just knowing where bids and offers are is-- is a bit more art than science-- we ended up, unfortunately, seeing some major fraud cases occurring when it came to people trading with the TARP program, where there had been market manipulation.

And so I'm hoping that there can start to be a conversation around that when it comes to the corporate bond-buying program. Because, again, these are taxpayer funds being used to support the market.

ADAM SHAPIRO: Chris White is one of the people we respect and listen to when we talk about bonds. He's the CEO of BondCliQ. We appreciate your being here on Yahoo Finance. This is going to be a continuing conversation. I look forward to when you come back.