US Federal Reserve Launches Bond-Buying Programme

A step not taken during the 2008 GFC, the Fed has started to buy corporate bonds in the secondary market, in a bid to support market liquidity and ensure credit availability.

The US Federal Reserve said on Monday (15 June) that it would begin buying “a broad and diversified portfolio of corporate bonds” to support market liquidity and the availability of credit for large employers in the country.

First announced in March, the programme will create at the Fed a corporate bond portfolio based on an index of all the bonds in the secondary market that have been issued by US companies that satisfy a minimum rating, maximum maturity, and other criteria. Essentially, the bonds will have to be from highly-rated, investment-grade companies, or firms that fit that description prior to Covid-19.

The bond-buying programme – which will not involve purchases of newly-issued debt – is being launched as part of the Secondary Market Corporate Credit Facility (SMCCF), which already buys ETFs. The SMCCD term sheet is available here.

Up to USD 750 billion of corporate bonds and ETFs made up of corporate bonds will be purchased through the programme, with the US Treasury Department providing USD 75 billion of taxpayer funds to offset losses.

The Fed’s purchases are expected to hold corporate bond yields down and make it cheaper for companies to borrow. However, lower yields could also prompt investors to shift their corporate bond holdings to the stock market.

As of 11 June, the Fed’s balance sheet has grown to almost USD 7.2 trillion, up from USD 4.2 trillion at the end of 2019, and about eight times larger than before the 2008 Global Financial Crisis.

During the 2008 Crisis, the Fed never took the step of buying corporate bonds. Indeed, it is technically prohibited by law from doing so.

To get around this, the Fed set up a special purpose vehicle in March – funded by the US Treasury and managed by BlackRock – to do the buying.

Some market participants expect that a similar mechanism could eventually allow the Fed to start buying stocks.