Fed’s Purchase Program Propels Corporate Credits

The Federal Reserve’s active buying of individual corporate bonds and certain exchange-traded funds (ETFs) under its recently launched credit facility has generally helped to spur prices of related products higher.

The central bank appears to have exerted significant influence over the demand for corporate credits, as well as the value of many ETFs, whose main investment objectives are exposure to U.S. investment-grade and higher-yielding corporate bonds.

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Fixed Income ETFs surge as Fed Forays into Market

Following its recent actions to help shore-up stability in the financial system, alongside its dual mandate to promote maximum employment and stabilize prices, the Fed has bought almost US$429m worth of select corporate debt and more than US$6.8bn worth of program-eligible ETFs.

The decisions, prompted by the ongoing COVID-19-related devastation, seems to have pushed prices on several instruments to stratospheric levels compared with their mid-March lows.

The Fed had noted that while “great uncertainty remains, it has become clear that our economy will face severe disruptions.”

“Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.”

To this end, among several other actions it undertook to help prop-up the financial system, the Fed established two facilities to support credit to large employers – the Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance, as well as the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds.

The central bank said its SMCCF will purchase investment-grade corporate bonds in the secondary market issued by U.S. companies, as well as U.S.-listed ETFs, with the cap on its combined facilities placed at US$750bn and slated to expire at the end of September 2020.

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Fed's purchases of fixed income ETFs

Among its top holdings, the Fed has bought nearly US$1.8bn worth of the iShares iBoxx US Dollar Investment Grade Corporate Bond ETF (NYSEARCA: LQD), a little over US$1.3bn of the Vanguard Short-Term Corporate Bond ETF (VCSH), and around US$1bn of the Vanguard Intermediate-Term Corporate Bond ETF (VCIT).

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The author does not hold any positions in the financial instruments referenced in the materials provided.

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