The Federal Reserve began buying bonds through exchange-traded funds (ETF) on Tuesday, to free up credit markets stalled by the financial turmoil triggered by the coronavirus outbreak.
The US central bank said it will start buying corporate bond ETFs, investment vehicles that buy bonds with a pool of capital from investors, as part of its $75bn Secondary Market Corporate Credit Facility (SMCCF) designed to assist US businesses in securing funds.
The bank, led by chairman Jerome Powell (pictured), may lever up that budget up to 10 times, joining forces with the US Treasury Department to buy as much as $750bn in corporate bonds, which represents around 8% of the $9.6trn US corporate debt market.
The program, which is part of the $2.3trn financial stimulus the Federal Reserve has committed to stabilizing the financial markets and the economy, plans to take in both investment-grade corporate bond ETFs, which buy bonds from companies with the highest credit ratings, and high-yield bond ETFs, also known as junk bond ETFs, which focus on low-rated corporate debt.
According to the Fed, Blackrock (BLK), a US asset management firm with over $7trn in assets under management and the owners of the iShares ETF family, will manage the program’s $750bn budget and it will earn a modest fee, capped at $7.75mn per year.
Bond yields have reacted positively to the Fed’s stimulus with US low-rated corporate bond yields falling from 9.8% to 7.95% since the beginning of April, while US investment-grade corporate bond yields have declined from 3.7% to nearly 2.9% during the same period.
Firms such as payments processor PayPal, tobacco company Altria and packaged food producer Mondelez have all issued bonds in recent days swapping frantically drew down bank credit lines at the beginning of the crisis for cheaper long-term debt, which some observers say is a sign that the move signaled by the central bank is already opening up markets,
The Fed has also announced it will be buying bonds directly from companies soon, as part of its Primary Market Corporate Credit Facility (PMCCF), to help US businesses in securing capital to strengthen their balance sheets while the economy reopens.
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