Fed issues details on bond buys
The United States Federal Reserve released a list of roughly 750 companies, including Apple, Walmart and ExxonMobil, whose corporate bonds it will purchase in the coming months in an effort to keep borrowing costs low and smooth the flow of credit.
The central bank also said it has, so far, purchased nearly US$429 million in corporate bonds from 86 of those companies, including AT&T, Walgreens, Microsoft, Pfizer and Marathon Petroleum.
The Fed announced in March that it would, for the first time in its history, purchase corporate bonds as the intensifying viral outbreak caused panicked investors to dump most types of securities in a rush to hold cash. That pushed up a range of interest rates and made it nearly impossible for companies to borrow more by issuing new bonds.
Yet, once the Fed said it intended to purchase up to US$750 billion of corporate debt, investors began buying bonds again and, eventually, large companies resumed issuing large amounts of new bonds. Recent economic research has found that simply by announcing the programme, the Fed was able to boost confidence in corporate bonds and improve the market’s efficiency.
Fed Chair Jerome Powell has said that by ensuring large companies can borrow more, the Fed is seeking to keep those firms from having to lay off workers. But the corporations aren’t required to keep all their workers.
At a hearing last week, Senator Pat Toomey, R-Pa, questioned Powell about whether the purchases were still necessary, since the corporate bond market has largely recovered. Powell said the Fed had to follow through on its promises.
BROAD MARKET INDEX
To avoid criticism that it might favour a specific industry, the Fed said two weeks ago that it would seek to mimic a broad market index approach and purchase bonds from a wide range of companies. Consumer product companies, such as Quaker Oats and the distiller Brown-Forman, which makes Jack Daniel’s and Woodford Reserve whiskeys, make up roughly a third of the index. That sector is followed by utilities, at 10 per cent, and energy firms, at more than 9 per cent. The index also includes insurance companies but no banks.
The Fed will only buy highly rated debt from financially healthy companies, or ones that were highly rated before the pandemic struck. The Fed is legally barred from lending to insolvent companies. It has said it would report on its purchases every 30 days.
The Fed said Sunday that it made its first bond buys from 86 companies last week. Those companies include Nike, broadcaster Fox Corp, Paypal, Target, Campbell Soup and chipmaker Broadcom.
The central bank is also purchasing pools of bonds in exchange-traded funds, which operate similarly to mutual funds. The Fed currently owns US$6.8 billion of bond ETFs.
The Treasury Department has provided US$75 billion in taxpayer money to backstop any losses from the bond buys. So far, the Fed’s purchases remain modest relative to the programme’s announced US$750-billion cap.
By comparison, since March it has purchased more than US$2 trillion in Treasuries and mortgage-backed securities in an effort to pump cash into short-term lending markets.