The Federal Reserve’s First-Ever Corporate Bond-Buying Program

Author: Nikki-Lee Birdsey

Estimated read time: 3 minutes

Publication date: 4th Jun 2020 11:59 GMT+1


Last week, the U.S. passed 40 million unemployment claims and reported 100,000 deaths due to Covid-19. The U.S. government has implemented many measures to counter the economic fallout, from one-off payment stimulus checks to American taxpayers to trillions of dollars in stimulus packages passed by Congress. 

On March 23, the U.S. Federal Reserve announced an unprecedented move in its history. The Fed would begin buying corporate bonds and exchange traded funds that held them in an effort to bolster corporations and equity markets. Congress then swiftly passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) on March 27. The Treasury Department has invested upwards of $36 billion of the $75 billion equity investment it committed under the Cares Act to help jumpstart the economy.

 

The Fed’s Corporate Bond-Buying Program

The name of this first-ever program is called the Secondary Market Corporate Credit Facility (SMCCF). Through this program the Fed buys U.S.-listed corporate bond ETFs with high exposure to U.S. investment grade corporate bonds and ETFs with high exposure to U.S. high-yield corporate bonds. Other criteria for chosen ETFs include: amount of debt held in depository institutions average tenor of underlying debt total assets under management average daily trading volume and leverage and composition of investment-grade and non-investment-grade rated debt, among other stipulations. In April, the Fed added so-called “fallen angel” companies whose debt fell into junk status after March 22, 2020. Companies rushed to issue corporate debt during the market rally, as investors clamored to get a piece of the companies that would benefit from the Fed back-up. According to some analysts about $575 billion in investment-grade debt has been issued since March 23.

 

How Much Will the Fed Spend?

The total capacity of bond purchases the Fed has through the SMCCF and the Primary Market Corporate Credit Facility (PMCCF) is $750 billon. This means the U.S. Treasury will make a $75 billion equity investment in the facilities, and the Fed will use its borrowing power to increase the capacity to $750 billion. How much has the Fed bought so far? By May 21 the SMCCF held $1.8 billion in corporate bond ETFs. The Fed announced that it will begin buying eligible individual corporate bonds “in the near future”.

Between March 23 and April 30 the Dow Jones Industrial Averaged jumped nearly 31 percent. The April gains were among the biggest one-month gains since 1987 despite Great Depression-era unemployment levels. Investor confidence seems buoyed by the Fed’s move, but it’s unclear what the long-term effects will be on U.S. economic recovery.


Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.com. The observations he makes are his own and are not intended as investment or trading advice.