Breaking News
Ad-Free Version. Upgrade your experience. Save up to 40% More details

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

Stock MarketsJun 16, 2020 12:35PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
© 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.

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.

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

Related Articles

Global markets regulators team up to monitor SPACs
Global markets regulators team up to monitor SPACs By Reuters - Jul 27, 2021

LONDON (Reuters) - Global securities markets regulators said on Tuesday they have begun monitoring special purpose acquisition companies or SPACs due to potential regulatory...

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (2)
Ben Barzelay
Ben Barzelay Jun 16, 2020 1:01PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
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.
David Knight
David Knight Jun 16, 2020 8:21AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
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.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email