Fed to sell corporate bonds and ETFs acquired during Covid-19 crisis

The Federal Reserve will soon begin selling corporate bonds and exchange-traded funds it amassed last year thanks to an emergency lending vehicle set up to contain the economic fallout from the Covid-19 pandemic .

The vehicle, known as the Secondary Market Business Credit Facility, or SMCCF, held $ 5.21 billion in bonds from companies such as Whirlpool. Corp.

, Walmart Inc.

and Visa Inc.

to April 30. In addition, he held $ 8.56 billion in exchange-traded funds that hold corporate debt securities, such as the Vanguard Short-Term Corporate Bond ETF.

The sales, which are expected to be finalized by the end of this year, are unrelated to monetary policy, a Fed official said. The net proceeds will be returned to the Treasury Department, which financed the establishment of the facility.

The SMCCF’s corporate debt holdings are separate from the more than $ 7.3 trillion in Treasury debt and agency mortgage-backed securities on the Fed’s balance sheet. The central bank under President Jerome Powell continues to buy these types of assets to the tune of at least $ 120 billion per month to keep borrowing costs down in the long run until the economy recovers. more of the pandemic.

The SMCCF was created in March 2020 as part of a larger set of programs put in place by the Fed and the Treasury to strengthen liquidity in financial markets. The stock and bond markets at the time were reeling from fear and uncertainty about the coronavirus and the economic lockdowns to contain it.

The Fed’s announcement of the facility and a related vehicle, the Primary Market Business Credit Facility, quickly restored investor confidence in the ability of large corporations to issue debt. As a result, the latter vehicle never made a purchase, and SMCCF holdings peaked at around $ 14.2 billion last year, a far cry from the $ 750 billion in firepower combined from the two programs.

“The SMCCF has proven to be essential in restoring the functioning of the market last year, supporting the availability of credit for large employers and strengthening employment during the Covid-19 pandemic,” the Fed said in a statement on Wednesday. .

Business credit programs stopped buying assets on Dec. 31 after then-Treasury Secretary Steven Mnuchin refused to extend several of the Fed’s emergency loan programs.

In testimony before the House Financial Services Committee last June, Mr Powell suggested that the central bank would likely hold onto individual corporate bonds until they mature, rather than reselling them in the market. “We’re generally a maturing entity,” Powell said in response to a question from a lawmaker about the Fed’s plans for the SMCCF. “We may resell some of it in the aftermarket later, but at the end of the day we are a buy and hold buyer,” Powell added.

In Wednesday’s statement, the Fed said it plans to sell bonds and ETF holdings in a gradual and orderly manner that seeks to minimize “the potential for any negative impact on the functioning of the market.”

The New York Fed, which manages the SMCCF, will provide additional details soon and before sales begin, the statement added.

Write to Paul Kiernan at [email protected]

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Appeared in the print edition of June 3, 2021 under the title “Fed to sell corporate bonds”.

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