Fed Makes Initial Purchases in Its First Corporate Debt Buying Program

Fed Makes Initial Purchases in Its First Corporate Debt Buying Program


The Federal Reserve rolled out the first stage of its corporate bond buying program on Tuesday, stepping into totally uncharted territory: buying longer-dated company debt.

The Federal Reserve Bank of New York said it would start buying exchange traded funds, which trade like stocks but have broad exposure to corporate bonds. It will then begin to buy bonds directly “in the near future,” according to a Monday night release.

Even before buying a single bond, the Fed managed to achieve its primary goal: restarting the frozen corporate debt market. It first announced that it would set up the programs on March 23, and the mere promise of a backstop revived the market, allowing companies to issue debt to raise needed cash amid the coronavirus economic downturn.

Once they are fully up and running, the Fed’s programs will buy both newly issued debt on the primary market and debt that is already being traded on a secondary market. The programs were expanded on April 9 to include some junk bonds.

April was a record month for United States investment-grade bond sales, which totaled more than $300 billion, according to data compiled by Bloomberg. The market for shakier bonds has also been revived.

“A lot of the heavy lifting has already been done,” Subadra Rajappa, head of United States rates strategy at Société Générale, said before the announcement.

The Fed is first buying E.T.F.s — mostly investment-grade but some high-yield — because they “serve as an efficient mechanism to access the corporate bond market” as the direct programs get up and running, it said in a footnote on Monday.

BlackRock Inc., which is the largest issuer of E.T.F.s, will run the program for at least its first three months. The New York Fed had previously announced that it had picked the firm’s advisory business to handle the purchases based on technical know-how. According to the Fed’s investment management agreement, BlackRock will not charge asset management fees on E.T.F.s in the program, and will pay back the value of other fees it earns on its own E.T.F.s.

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Nevertheless, the firm is a beneficiary of the program as a market backstop. BlackRock’s high-yield fund, HYG, bounced on the initial news of the corporate bond facility and took another leg up after the Fed expanded program criteria in April to include riskier debt. Some of those gains have since faded, but it is a sign that in improving broader market functioning, the Fed’s program announcement helped the fund.

It is unclear how extensively the two central bank programs will be used. The pricing and terms are such that the direct-buying facility in particular may not see huge use, economists and strategists said. Instead, it will serve as a kind of safety blanket assuring investors that the Fed will step in if markets become volatile.

In particular, companies must demonstrate that they were not able to access credit from a bank or on the open market at reasonable terms before using the primary market program, which could create a stigma.

“There’s a good chance the primary facility may not be used,” said Gennadiy Goldberg at TD Securities in New York. “It’s a good outcome — if they intend to be a market backstop, it’s actually OK.”

The mere announcement of the programs has already enabled a wave of new corporate bond issuance. Boeing raised $25 billion in a late-April bond sale. Outstanding bonds have also recovered, and as the Fed pledged to buy debt from recently downgraded companies, it lifted prices and reduced rates on debt that had been issued by so-called “fallen angels,” including Ford Motor.

When it comes to the secondary-market program, which focuses on already-issued bonds, the Fed said in its investment management agreement released Monday that purchases would vary based on market conditions, with a goal of “reducing the broad-based deterioration of liquidity seen in March 2020 to levels that correspond more closely to prevailing economic conditions” that will eventually transition into “a reduced, steady pace” of buying to maintain market functioning.

Given that secondary market functioning has largely returned to normal, that could be a quick process.

While the program has been cheered by many on Wall Street for reinvigorating credit markets, there are critics of the central bank’s actions to shore up the big companies that tap corporate debt markets.

The antimonopoly group American Economic Liberties Project has been characterizing the corporate program as a “bailout” for companies like Boeing, which has managed to issue debt since the Fed announced that the program was coming and restored market functioning.

Some analysts said the idea that helping larger companies is a problem is misplaced.

“This is all about, in the end, supporting employment,” said Steven Friedman, a former New York Fed economist now at the investment management firm MacKay Shields. “The companies that employ people need access to credit” and “it’s really about the survivability of firms,” he said.

The Fed has announced initiatives to help smaller companies and governments, but those are also never-before-attempted and have yet to get up and running. It has set out plans for a “Main Street” lending program for midsize companies, and has said it will buy municipal bonds to boost states and large cities and counties.

This facility is the first Fed emergency lending program backed by a recent congressional appropriation to begin operating. Lawmakers earmarked $454 billion to provide insurance against losses to the Fed programs, and some have been eager to see it used.

Representative Katie Porter, a Democrat from California, sent the Fed and Treasury a letter last week asking why they had not tapped the money yet.

The Treasury has earmarked $75 billion in total funding for the corporate bond-buying program, with $25 billion of that meant to support bond-buying through the secondary market program and $50 billion meant to back up direct bond purchases.

That funding could support $750 billion in total purchases, though it may not use that capacity.

“Companies are out there financing, they’re out there raising liquidity,” Fed Chair Jerome H. Powell said at his April 29 news conference. “The ultimate demand for the facilities is quite difficult to predict, because there is this announcement effect that it really gets the market functioning again. Of course we have to follow through, though.”


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