Fed installs Backstop for Corporate Bonds

Last Week, the Fed announced that it is going to buy single corporate bonds to ensure a functioning secondary corporate bond market, which is a historical move and a positive sign for a market that was close to collapsing in March this year, when liquidity disappeared just in a matter of days.

The Fed is going to expand the scope of its bond purchase program by creating a “broad, diversified market index” and purchasing individual corporate bonds in the secondary market. This is another remarkable step of the Fed to prove its commitment to install a backstop for the corporate debt market. With this adaption, the Fed will not only invest in bond ETFs, but also in single bonds. Federal Reserve Chairman Jerome Powell reinstated the central bank’s goal of prioritizing a proper market functioning via its purchases. He added: “I don’t see us as wanting to run through the bond market like an elephant doing things and snuffing out price signals or anything,” Powell told the Senate Banking Committee. “We want to be there if things turn bad in the economy.” Powell also said that market functioning has improved “substantially” since setting up its operations.

Fed Activity

Since the second week of May, the Fed has been purchasing corporate bond ETFs with “broad exposure” to U.S. investment-grade debt and some high-yield debt from companies that fell below investment-grade after March 22.

The Fed’s corporate bond purchases are currently done through its “Secondary Market Corporate Credit Facility”, which began operations on May 12 with plans to continue through September 30. The facility is backed by USD 25 bn of equity from the U.S. Treasury, appropriated through the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in March.

A separate facility, the “Primary Market Corporate Credit Facility”, plans on purchasing corporate debt directly from the issuers themselves. The facility, which is backed by USD 50 bn of equity, has yet to go live. Combined, the two facilities can be levered up to support as much as USD 750 bn in purchases. As of June 10, the secondary facility had only USD 5.5 bn of purchases, all in bond ETFs.

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Fed installs Backstop for Corporate Bonds
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