The Market After a Month of the Fed’s Bond-Buying Program

Written by: Nikki-Lee Birdsey

At the end of March the U.S. Federal Reserve announced it would create two facilities to buy up corporate debt in a first-ever move to support markets affected by the coronavirus pandemic credit crunch. The name of this program is called the Secondary Market Corporate Credit Facility (SMCCF). Through this program the Fed bought U.S.-listed corporate bond ETFs with high exposure to U.S. investment grade corporate bonds, and ETFs with high exposure to U.S. high-yield corporate bonds.

The announcement sparked a market rebound amid optimism that seemed to contradict the rising unemployment claims and economic loss as a result of outbreak-related lockdown measures.

Recently, Federal Reserve Chairman Jerome Powell announced that the Fed will eventually stop buying ETFs and instead buy individual company debt directly. In remarks before the House Financial Services Committee, Powell said last week: “Over time we’ll gradually move away from ETFs and move to buying bonds,” Powell said. “It’s a better tool for supporting liquidity and market functioning.”

How much has the Fed bought so far?

In total the Fed has purchased $5.5 billion worth of bond ETFs as of June 9, which is just a small amount of the facility’s $250 billion capacity. The program has appeared successful, with bond ETFS and the credit market rebounding and recovering losses since February. Companies are still rushing to issue debt amid all the buying. ETFs that the Fed bought include: iShares iBoxx investment-grade corporate bond ETF (NYSEARCA: LQD) Vanguard intermediate-term corporate bond ETF (NASDAQ: VCIT) as well as Vanguard short-term coporate (NASDAQ: VCSH) and iShares high-yield corporate (NYSEARCA: HYG). Other ETFs include SPDR Bloomberg Barclays high yield (NYSEARCA: JNK) and VaneEck Fallen Angel high yield (NASDAQ: ANGL).

How long will the Fed’s program last?

The central bank also said last week that it would pause buying once market conditions return to pre-coronavirus pandemic levels, while reserving the right to resume purchasing if the situation worsens. While the Fed’s unprecedented moves to support the market seemed to have calmed fears and put the market back to business as usual, questions remain about what will happen when the Fed exists the market.

On Sunday night Eastern Time, the S&P 500Dow and U.S. Nasdaq futures tumbled as some states reported sharp increases in daily virus case counts. California, Florida, Georgia and Arizona all posted worringly high case numbers as their states lifted some lockdown measures in an effort to reopen economies.

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