Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Fed corporate bond move relieves potential stigma for companies, say investors

Published 06/16/2020, 06:12 AM
Updated 06/16/2020, 12:35 PM
© Reuters. People walk wearing masks outside The Federal Reserve Bank of New York in New York

© Reuters. People walk wearing masks outside The Federal Reserve Bank of New York in New York

By Kate Duguid and Megan Davies

NEW YORK (Reuters) - The New York Federal Reserve's planned launch on Tuesday of a bond-buying facility could help ease the potential stigma for companies of asking for help and create an important framework for what the central bank steps in to purchase, analysts and investors said.

The Federal Reserve said that, starting Tuesday, it would buy corporate bonds directly through its secondary market corporate credit facility (SMCCF), one of several emergency programs recently instituted by the central bank to improve market functioning in the wake of the coronavirus pandemic.

"They are creating a plan, a framework for what they're going to do," said Nick Maroutsos, co-head of global bonds for Janus Henderson. "I'd be more concerned if they didn't have a framework and they just started buying bonds blindly."

The Fed's pledged backstop of corporate bonds has allowed companies to continue borrowing money from credit markets despite the toll of the coronavirus on corporate earnings.

The Fed will buy a portfolio of individual bonds in an index that replicates the broad credit market, focused primarily on high-quality names. The program, which also included buying exchange-traded funds, had previously been announced but required companies to apply for direct bond purchases. On Monday, the Fed removed the need for that certification.

Aneta Markowska, chief financial economist at Jefferies (NYSE:JEF), said eliminating the need for an application was critical. "Most don't want to be seen as asking the Fed for help, unless things go really wrong. So the change eliminates an important hurdle," Markowska said.

The change comes after markets were roiled last week following Fed Chair Jerome Powell's bleak outlook on the U.S. economy and fears of a second wave of coronavirus infections.

John Roberts, U.S. rates strategist at NatWest Markets, said it will now "presumably not be discernible which corporates certified for the program and which did not," removing a potential stigma.

The Fed declined to comment.

The Fed has also pledged to buy corporate bonds directly from issuers through its Primary Market Corporate Credit Facility, which has yet to launch.

According to Intercontinental Exchange (NYSE:ICE), there are 8,181 investment-grade issues eligible for inclusion in a high-grade U.S. corporate bond index.

The announcement sent the credit market soaring on Monday, with the iShares iBoxx Investment Grade Corporate Bond index (P:LQD) hitting an all-time high of $134.83. U.S. stocks also rallied on the news. On Tuesday morning, the iShares iBoxx investment grade ETF hit a fresh all-time high of $134.9, while the iShares iBoxx high yield ETF (P:HYG) rose as high as $84.33, last at $83.47.

Creating its own index also allows the Fed to avoid potential issues with buying ETFs. The central bank has bought modest portions of ETFs under the aegis of the SMCCF in recent weeks, which has driven the products to trade at a premium to the value of their underlying bonds.

© Reuters. People walk wearing masks outside The Federal Reserve Bank of New York in New York

Supporting the market through the Fed's own index "gives them a straighter shot to buy, to buy in size and to not be accused of overpaying," said Robert Tipp, chief investment strategist and head of global bonds at PGIM Fixed Income.

Latest comments

Infrastructure should be the only investment for the future of jobs and the betterment of our nation.  No accountability teaches the children to be as irresponsible as these so called leaders.  If it's not helping them instantly why should they care of the future generations.  Short sited; narrow minded, self interest creates a failure when no accountability is given to irresponsible failed leadership.
you are weak. the fed cant take care of itself. its like a child running around crying.your friends made bad deals.let deserve people take the oppurtunity.
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.