The Fed begins purchases of up to $250 billion in individual corporate bonds
- The Federal Reserve announced Monday it will begin purchases of individual corporate bonds.
- The move comes nearly three months after first unveiling the Secondary Market Corporate Credit facility and one month after it began buying corporate-credit ETFs through the program.
- The central bank will “create a corporate bond portfolio that is based on a broad, diversified market index of US corporate bonds,” according to a press release.
- The Fed’s late-March announcement of its move into corporate bond purchases set a floor for risk assets and helped valuations rebound from their pandemic-induced lows.
The Federal Reserve announced Monday it will begin buying individual corporate bonds 85 days after unveiling the purchase policy and alleviating intense credit-market pressures.
The program, also known as the Secondary Market Corporate Credit Facility, will take in up to $250 billion in corporate bonds from eligible issuers. The Fed can also tap $25 billion in funding assistance from the Treasury Department as set aside by the CARES Act.
The central bank updated the program to “create a corporate bond portfolio that is based on a broad, diversified market index of US corporate bonds,” according to a press release. The portfolio will complement purchases of corporate-credit exchange-traded funds through the SMCCF since May 12.
Individual bond-buying will begin on Tuesday, according to a separate statementfrom the New York Fed.
The Fed’s first purchases of individual bonds arrive months after the program’s March 23 reveal set the bottom for risk markets. Investors flocked back to stocks and corporate debt after the announcement, heralding the facilities as a backstop for both asset classes. Before any individual bonds were taken up by the Fed, the S&P 500 rallied out of its coronavirus slump on the policy-fueled optimism and hope for a rapid economic recovery.
The central bank has taken in roughly $5.5 billion through its ETF purchases so far. Its Primary Market Corporate Credit Facility, which will focus on buying debt directly from firms, is not yet operational and can take in up to $500 billion of corporate credit.
The Fed’s announcement helped stocks erase the last of their early losses.
Participating issuers need to have been rated investment-grade as of March 22 to participate in the Fed’s individual bond purchases, according to a term sheet. Bonds bought on the secondary market must also have remaining maturities of five years or less. The junk-bond market is still receiving some central bank aid from its ETF purchases.
The central bank also opened its Main Street Lending Program on Monday to lender registration. The move allows banks to sign up for offering loans to eligible small- and medium-sized businesses. The Boston Fed will soon begin purchasing 95% of loans made through the Main Street program.
The $600 billion facility was also revealed in late March but has run late in starting operations due to last-minute changes, chairman Jerome Powell said during a Wednesday press conference.