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June 15, 2020 3:30 PM, EDT

Fed Will Begin Buying Broad Portfolio of Corporate Bonds

The Marriner S. Eccles Federal Reserve building in Washington.The Marriner S. Eccles Federal Reserve building in Washington. (Andrew Harrer/Bloomberg News)

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The Federal Reserve said June 15 that it will begin buying individual corporate bonds under its Secondary Market Corporate Credit Facility, an emergency lending program that to date has purchased only exchange-traded funds.

The central bank also added a twist to its buying strategy, saying it would follow a diversified market index of U.S. corporate bonds created expressly for the facility. The Fed built the index internally, and a spokesman couldn’t immediately say whether its details would be made public.

“This index is made up of all the bonds in the secondary market that have been issued by U.S. companies that satisfy the facility’s minimum rating, maximum maturity and other criteria,” the Fed said in a statement. “This indexing approach will complement the facility’s current purchases of exchange-traded funds.”

Investors Cheer

U.S. stocks climbed to the highs of the day after the announcement.

The S&P 500 erased the day’s losses to trade as much as 1.3% higher. BlackRock’s iShares iBoxx $ Investment Grade Corporate Bond exchange-traded fund, the largest credit ETF, jumped 1.9% to hit session highs, while the iShares iBoxx High Yield Corporate Bond ETF climbed as much as 1.6%.

”This doesn’t surprise me at all. The Fed has to keep its credibility,” said Christine Todd, head of U.S. fixed income at Amundi Pioneer Asset Management. “While there were some that felt the promise was enough, and the Fed was going to rely on the promise being enough, that has proven not to be the case.”

The New York Fed said in a separate statement that purchases of bonds from eligible sellers will begin on June 16.

Buying Levels

The Fed said it could slow or even pause daily purchases if market functioning showed sustained improvement, though buying could pick back up if conditions worsened again.

The SMCCF is one of nine emergency lending programs announced by the Fed since mid-March aimed at limiting the damage to the U.S. economy by the coronavirus pandemic. With a capacity of $250 billion it has so far invested about $5.5 billion in ETFs that purchase corporate bonds.

An index assures the Fed complies with the spirit of the law under Section 13.3 of the Federal Reserve Act which says emergency lending facilities must be broad based, and provides a mechanism for the central bank to avoid industry concentration.

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