- Fed to buy $750 billion in corporate bonds and ETFs containing them
- The majority of ETFs chosen will hold investment-grade debt
- The SMCCF will buy individual corporate bonds “in the near future.”
The Fed’s brand new program, the Secondary Market Corporate Credit Facility (SMCCF), will start buying U.S.-listed corporate bond ETFs today as part of the effort to support the economy. “The preponderance of ETF holdings will be of ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds, and the remainder will be in ETFs whose primary investment objective is exposure to U.S. high-yield corporate bonds,” said the statement from the New York Fed.
Other factors that will determine if an ETF is chosen will be:
- composition of investment-grade and non-investment-grade rated debt
- management style
- amount of debt held in depository institutions
- average tenor of underlying debt
- total assets under management
- average daily trading volume, and leverage, if any
BlackRock is the investment manager, but they wouldn’t dare ignore other issuers’ funds as well
The historic announcement that the central bank would buy corporate bonds and exchange traded funds that held them was made on March 23. It spurred a fierce rally as investors tried to guess where liquidity was headed. On April 9, the Fed added “fallen angels,” or companies whose debt recently fell into “junk” status, to its shopping list. Seeing a voracious appetite, companies rushed to issue debt and build their war chests. According to Credit Flow Research, about $575 billion in investment grade debt has been issued since March 23.
The total value of the bond purchases made through the the SMCCF and the Primary Market Corporate Credit Facility (PMCCF) is expected to be up to $750 billion. The Treasury Department has so far invested $37.5 billion of the $75 billion equity investment it committed to support these programs as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The SMCCF will start buying individual corporate bonds and the PMCCF will become operational “in the near future.”
The big question now is, will the Fed conjure up a way to buy stocks or index-tracking ETFs and at what price point? It sounds extremely improbable, but so did corporate bond-buying a while ago. Vincent Deluard, global macro strategist for brokerage INTL FCStone, told Bloomberg that as companies halt buybacks, it will leave “a permanent $500 billion-plus gap in the equity supply-and-demand picture.” He said, “So as you remove that, you will need to fill it. I don’t think the retail bid, this is a cute story and I’m glad people are making money, but I don’t’ think it’s a sustainable source of demand. I only see one possible actor, and that’s the Fed.”
While investors initially liked the news on April 9, that the Fed would be buying high-yield bond ETFs, the response has been tepid since. We’ll see if that changes today.
Author: Deborah D’Souza
Source: Investopedia: Fed Kicks Off Unprecedented Corporate Bond-Buying Program