Uneasiness is mounting about what some analysts view as a "toxic legacy" left behind by the Federal Reserve's unprecedented quantitative easing (QE) program and the towering debt it is leaving behind.
When the Fed unveiled its ultra-easy monetary policies 2008, the aim was to spawn so much liquidity that investors would be willing to venture out of safe harbors and into riskier assets,
The Financial Times reported.
The problem is that the strategy may have worked too well.
"Wall Street's securitization machine has kicked back into gear to churn out bonds that package together corporate loans, commercial mortgages and, of course, subprime auto loans," The Times reported.
Dealogic data showed corporate junk bonds sold in 2013 totaled $359 billion — a record. And asset-backed securities (ABS) that bundle together sub-prime auto loans have reached $17.4 billion so far in 2014, the highest level since the 2008 meltdown.
"The question now is whether the rebound in sales of risky assets will prove to be a toxic legacy of QE in a similar way that the popularity of subprime mortgage-backed securities was partly spurred by years of low interest rates before the financial crisis," said The Times.
Demand has been so strong for the subprime auto ABS that some of them are being pre-sold even before the loans are made, The Times reported, similar to the way the subprime mortgage packages that nearly brought down the U.S. economy in 2008 were sold.
"QE has flooded the system with cash and you're really competing with an entity with an unlimited balance sheet," said Manish Kapoor of West Wheelock Capital of the U.S. central bank. "This has enhanced the search for yield and caused risk appetites to increase."
The Times said some analysts fear the liquidity created by the Fed has goosed demand in financial markets more than it has helped the real economy. Such an outlook could mean the demand has been artificial rather than something tangible for average Americans.
"It's not the underlying economics that's driving things, it's central bank liquidity," Matt King of Citigroup told The Times. Unconventional monetary policies are "very good at driving up asset prices but the trickle-through to things like inflation is very weak."
Bloomberg reported the Fed intends to maintain the record $4.48 trillion balance sheet it has amassed since announcing the first round of bond purchases in November 2008.
Such a tactic would be aimed at limiting the supply of securities trading on the public markets, which hopefully would keep prices up and yields lower than they otherwise would be.
The Federal Open Market Committee is expected to end its purchases of Treasurys and mortgage bonds at its meeting this week.
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