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April 01, 2020 at 12:35 AM
The Federal Reserve Board has rushed to create a large menagerie of funds that will try to keep deals happening in U.S. investment markets, by buying certain types of assets, such as commercial paper, and investment-grade corporate bonds.
Critics, including Jim Bianco, say that the Fed is exceeding its statutory authority and, in effect, helping the U.S. Treasury nationalize large parts of the financial markets.
Supporters say the Fed is simply nursing the investment markets through the upheaval caused by the effort to control the COVID-19 pandemic.
(Related: Fed Goes All In as Investors Wait on Congress)
Shachar Gonen and other analysts at Moody’s Investors Service predict that, for U.S. life insurers, the effect of one of the new funds, the Secondary Market Corporate Credit Facility (SMCCF), will be to help keep corporate bond downgrades from hurting the insurers’ own finances.
A bond is a security that a company or organization uses to borrow money from investors.
The SMCCF will buy investment-grade bonds that are already somewhere in the “secondary market,” meaning that an insurer, pension plan, university endowment, mutual fund or other investors owns the bond.
U.S. life insurers use earnings on large investment portfolios to support their obligations to insurance policyholders and annuity contract holders.
Life insurers ended 2018 with $4.2 trillion in cash and invested assets, including about $3 trillion in bonds, and more than $2.8 trillion in bonds issued by “investment-grade” corporations, or corporations with high credit ratings.
