The Federal Reserve Bank of New York is starting to try to keep the U.S. corporate bond market moving, by buying high-grade corporate bonds that are already on the market when no one else will buy the bonds.
The bank said Monday that it has put $37.5 billion into “special purpose vehicle,” or investment fund, that will fuel a new Secondary Market Corporate Credit Facility SMCCF and a new Primary Market Corporate Credit Facility (PMCCF).
The PMCCF will help organizations with high credit ratings borrow money, by issuing bonds, when finding buyers for new bond issues is difficult.
The SMCCF will be buying high-quality corporate bonds, and shares of U.S.-listed exchange traded funds (ETFs) that invest mainly in corporate bonds, that are already on the market, when the holders of those bonds have a hard time finding buyers.
The New York Fed established the PMCCF and the SMCCF, with help from BlackRock, in March, after COVID-19-related turmoil began to freeze the bond market.
The bank plans to add a second infusion of $37.5 billion into the SMCCF later.
Figures from the New York Fed show that, between mid-March and early April, the turmoil caused the volume of corporate securities deal transaction failures to double.
Life Insurers care deeply about the health of the secondary corporate bond market, because they have about $2.8 trillion of their $4.2 trillion in assets invested in corporate bonds.
Life insurance policies and annuities are, mainly, consumer-friendly financial sausages stuffed with corporate bonds, and derivatives used to keep the corporate bond stuffing fresh and tasty.
For life insurers, one risk associated with holding bonds is that the issuers could fail.
Another risk is that rating agencies could lower the bond isuers’ credit ratings.
State insurance regulators try to encourage life insurers to hold the safest bonds possible. They base the amount of bond value a life insurer can include in its risk-based capital ratio, or basic financial health indicator, on a bond’s rating.
Steve Zabel, the chief financial officer at Unum Group, said last week, during a conference call the company held to go over first-quarter results with securities analysts, said that the company was happy to see news of the SMCCF coming to life.
In the first quarter, rating agencies downgraded $336 million in investment-grade securities to high-yield, or “junk bond,” status, Zabel said.
That led to a $14 million increase in required capital, Zabel said.
In April, he said, rating agencies turned another $119 million of the company’s investment-grade securities into high-yield securities.