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NY Fed says it will begin to sell corporate bond ETFs on June 7

EconomyJun 03, 2021 04:01PM ET
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© Reuters. FILE PHOTO: The Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 27, 2019. REUTERS/Brendan McDermid/File Photo

By Jonnelle Marte and Kate Duguid

(Reuters) -The Federal Reserve will start selling its stakes in 16 bond exchange-traded funds next week, the Fed Bank of New York said on Thursday, the first step in unwinding a nearly $14 billion corporate credit portfolio that helped restore order to a market that had become unhinged early in the COVID-19 pandemic.

The New York Fed's plan for gradually disposing of those holdings came a day after the Federal Reserve Board said it would shed the assets of the Secondary Market Corporate Credit Facility (SMCCF), one of a bevy of emergency measures launched last spring to shore up financial markets badly shaken by the pandemic's rapid spread and disruption to the economy.

The SMCCF ultimately saw little use, but Fed officials said the mere fact of establishing it helped to restore market confidence, allowing credit to keep flowing to households and businesses. It, along with most of the Fed's other emergency credit programs, formally closed to new asset purchases at the end of last year.

The decision to fully wind it down "indicates that the Fed views the corporate bond market as fully healed, and I would agree," said David Del Vecchio, U.S. corporate investment grade bond portfolio manager at PGIM.

As of April 30, the facility had $13.8 billion of debt outstanding, including about $8.6 billion of stakes in 16 corporate bond ETFs and $5.2 billion of corporate bonds, according to Fed data.

The Fed said the sales will be "gradual and orderly," taking into account daily liquidity and trading conditions.

The New York Fed, which manages the corporate credit facility, said ETF sales would start on June 7 and it will start selling the bonds later this summer. The Fed plans to sell all of the SMCCF's holdings by year end.

The corporate bond market showed little response to the move and it is not expected to have further major effects. Early in the New York session all 16 corporate bond ETFs held by the Fed were trading modestly lower, down by between 0.05% and 0.35%. By afternoon, some of those moves had reversed.

"It's such a small amount I think the actual selling is going to be irrelevant to the market," said Monica Erickson, head of investment grade corporate debt at DoubleLine.


The move came as markets are on high alert for any signal the Fed may be ready to start withdrawing the massive support it has provided to the economy during the crisis through near-zero interest rates and large-scale asset purchases.

After Wednesday's announcement, a Fed official said the decision to wind down the SMCCF was unrelated to monetary policy. The central bank is separately buying $120 billion a month in government securities to support the economy as part of its monetary policy.

A full debate among policy makers about when to start reducing those purchases appears imminent, and some market participants were skeptical of the Fed's assertion there was no connection to that process.

Bank of America (NYSE:BAC) analysts, for instance, said the corporate bond announcement suggested that the U.S. central bank was closer to normalizing monetary policy than markets expect.

Others, however, said that while the Fed may be preparing to discuss tapering, the announcement didn't offer new insight.

"It doesn't signal anything too new, since we know they are 'talking about talking about' tapering. But to be honest, I don't think they'd be unwinding the corporate facility if they weren't also getting closer to tapering time," said Tom Graff, head of fixed income at Brown Advisory.

Prior to the Fed announcement on Wednesday, Philadelphia Fed Bank President Patrick Harker said that while the central bank planned to keep interest rates "low for long," it may be time "to at least think about thinking about tapering our $120 billion in monthly Treasury bond and mortgage-backed securities purchases."

NY Fed says it will begin to sell corporate bond ETFs on June 7

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Michael Angelo
Michael Angelo Jun 03, 2021 1:03PM ET
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Felipe Daniel Jun 03, 2021 12:59PM ET
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