Home > Fed to Start Buying Corporate Bonds

Fed to Start Buying Corporate Bonds

June 16, 2020 By Mircea Vasiu

Another Monday, another surprise from the Fed – it announced that the updated Secondary Market Corporate Credit Facility (SMCCF) would include buying corporate bonds. The announcement sent the US stock market soaring, with the DJIA settling over two-thousand points higher from the overnight futures low.

Interestingly enough, the announcement comes, once again, on a Monday. One week ago, still at the start of the trading week, the Fed announced new conditions to allow small and medium businesses quicker access to funding. Two days later, the FOMC press conference offered more details, and now, after another two trading days, Fed announces further easing measures.

What Will the Fed Actually Do?

What the Fed plans is to extend emergency loans to large corporations. Only this time, the approach will not require companies to seek out funds directly. Instead, the Fed will create an index of US corporate bonds based on eligible companies.

The approach here is unique and opens up plenty of questions. For instance, if the Fed is able to buy corporate bonds by simply creating an SPV (Special Purpose Vehicle), how long would it take until it will have an SPV that directly buys stocks?

Many critics argue that the only reason why the stock market is up and threatening new highs (Nasdaq printed a new all-time high during the pandemic) is the Fed. Therefore, voices about stock price manipulation and unsustainable valuations critic the Fed’s approach.

However, the idea behind the Fed’s decision will further ameliorate funding and access to credit for corporate America. As a direct consequence, it will stimulate economic growth and, ultimately, one of the pillars of the Fed’s mandate – job creation. The bond-buying will effectively start today, and BlackRock is the company doing the transactions.

Via the SMCCF program, the Fed will purchase corporate bonds of US companies rated as investment-grade, but also will purchase bonds of companies rated at least BB-/Ba3 at the time of the purchase. The SPV will benefit from direct funding from the US Treasury ($75 billion), with $25 billion dedicated to operations in the secondary market, and $50 billion to operations in the primary market. The Fed’s idea is to build a broad market index that tracks a diverse of secondary market bonds, refreshing it constantly to find new candidates.

As mentioned earlier, the stock market jumped on the announcement. What is interesting is that the SPV, while funded by the US Treasury, effectively uses taxpayers’ money and hands it to US corporations.  That will go down as one of the boldest decisions ever taken by the Fed.

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