The Feds to Start a New Program to Purchase Corporate Bond ETFs

As part of the government’s strategy to salvage the US economy during the coronavirus pandemic, the Federal Reserve has introduced a bond ETFs program. The program is aimed at supporting credit flow as corporations struggle to survive the impact of the coronavirus pandemic which has put a stop to supply chains, drastically cut consumer spending, and rendered millions jobless.

Since many large businesses mostly rely on corporate bond markets to borrow money during financial crises rather than banks, the Fed’s action would make financial support more available to large businesses in need of it.

The Fed announced on Tuesday that it would begin a corporate bond program despite the increasing debt issuance. BlackRock has been appointed to run this program under the supervision of the New York Fed. The central bank will also launch its Secondary Market Corporate Credit Facility, an initiative that would enable the bank purchase exchange-traded funds that will be used to track the corporate debt market.

BlackRock will particularly purchase bond ETFs of companies that are considered “fallen angels” and that are in dire need of salvaging. This category of companies includes companies that were formerly classified as investment grade but have now downgraded to speculative or junk, especially if the recent downgrades were caused by the impact of the coronavirus crisis.

There is also a Primary Market Corporate Credit Facility, another initiative through which the Fed will purchase actual bonds and syndicated loans. This initiative is said to kick off soon.

Like many other markets, the corporate debt market has experienced rough times. Earlier this year, the market slumped due to the increasing impact of the coronavirus. In April, issuance of $834.3 billion was up 69% year to date over the same period a year ago. March and April experienced record amounts brought to market. The market was hit with $25.7 billion on Monday.

Under the emergency lending program ratified by the US Congress, the Treasury Department has allocated $75 billion of equity to the Fed. The capital will lever up on a 10 to 1 ratio, (that is borrowing $10 for every $1 invested), parlaying it into $750 billion worth of funds.

While the Fed will be purchasing ETFs there is a condition attached. The Fed has said it will not purchase bonds that are trading more than one standard deviation over their net asset value within a year. However, there will be other considerations likewise.

According to an announcement made by the New York Fed on Monday, there were no specific details about which ETFs will be purchased by the central bank. Generally, the ETFs will include both investment grade and speculative debt management style, average daily trading volume and leverage, the amount held in depository institutions, and the length of time the syndicated loans will be due.