Market strength prompts Fed to begin corporate bond unwind

NEW YORK , Jun 4 (IFR) – A little over a year after the US Federal Reserve began buying corporate bonds and exchange-trade funds in the secondary market to help stabilise debt markets hit by the Covid-19 pandemic, the central bank has decided it will begin selling off those assets.

The Fed was expected to hold the bonds until maturity, but announced on Wednesday it will begin selling off its US$13.7bn corporate bond holdings gradually, starting on June 7 with its ETF portfolio. The holdings include some US$5.2bn of individual investment-grade bonds issued by companies such as AT&T, Comcast and Verizon as well as U$8.6bn of high-grade and high-yield ETFs.

The Secondary Market Corporate Credit Facility and Primary Market Corporate Credit Facility were massively successful from a messaging standpoint as they gave issuers and investors confidence that there would be access to capital through a buyer of last resort.

But in terms of actual purchases, the programme did very little as it bought shares in just 16 ETFs and 1,204 bonds from 531 issuers comprising just 0.2% of the broad investment-grade index. Indeed, the secondary market facility was shut down on December 31, while the primary facility never bought a single bond.

“I think this announcement sends a strong message that the Fed is no longer needed as a buyer of last resort, and there is plenty of liquidity for every IG name,” one syndicate banker said. “I view it as a positive in every way.”

Spreads are pinned at historic tights, the economy is growing at 6% or higher and the labour market is continuing to get better as each day goes by, said Peter Duffy, CIO of Credit at Penn Capital.

“Basically, we are in a de minimis default environment and to that you have to say ‘mission accomplished’ to the Fed because that’s exactly what they were trying to do,” Duffy said.

Two questions

That doesn’t mean the move is insignificant, however. Its importance lies in what it signals about the Fed’s next move. “This is significant in that it essentially opens the door to the discussion on tapering,” Duffy said.

Specifically, it raises two questions. BMO analysts in a Thursday report asked whether the Fed’s move means that future interventions in credit markets are less likely – and whether it alters the timing, pace or composition of the Fed’s tapering plans?

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