Fed says it expects limited usage for primary market corporate credit facility

Author: Adam Button | Category: Central Banks

...under current market conditions

The Fed has to be re-thinking its corporate bond buying programs. They're a public-relations nightmare. The volumes so far are low and you have to hope they're just completing this programs to prove that they can because the optics right now are awful. They bought bonds from cigarette-maker Phillip-Morris on Friday at about 0.55%.

As Matt Levine puts it today:

The Federal Reserve's program for buying corporate bonds is quietly one of the wildest stories of 2020. It was announced in March, when things were very bad generally and people were worried that the investment-grade corporate bond market would seize up and it would be impossible for big real companies to get financing. So the Fed said: Don't worry, we'll take care of it, in a very broad and general way. The Fed was willing to lend money directly to companies, to buy their bonds in the secondary market, to buy exchange-traded funds that owned bonds, really whatever it took.

As far as I can tell, this announcement immediately and completely solved the problem. Everyone said "oh, okay, the Fed is backstopping the investment-grade market, we're good now," and they went back to enthusiastically buying bonds. Rates fell to record lows and issuance came at a record pace, even as the Fed bought zero bonds. The Fed accomplished its entire goal just by announcing the program. You might think that would be the end of the story. This is exactly how it's supposed to go. "If you've got a bazooka, and people know you've got it, you may not have to take it out," Hank Paulson memorably said; that is the point of announcing huge open-ended programs like this. You don't want to take it out; the Fed is not especially in the business of buying or owning corporate bonds, and it would be much easier for everyone if it didn't. If saying "we'll buy as many corporate bonds as we need to" completely fixed the corporate bond market, as it did, then the number of bonds you need to buy is zero, and the number of bonds you want to buy is zero, so the number of bonds you should buy is zero.
That this program continues is the best proof that the Fed doesn't really care what anyone thinks and will buy everything to keep the party going.

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