bla A big old office building The Federal Reserve Bank of New York building, as seen from Equitable’s old building. (Photo: Allison Bell/ALM)

Two new funds that are supposed to help the Federal Reserve Bank of New York stabilize the U.S. corporate bond market gave the bond market a careful little tap in the seven-day period ending Wednesday.

The Corporate Credit Facility LLC — the parent of the Secondary Market Corporate Credit Facility (SMCCF) and the Primary Market Corporate Credit Facility  (PMCCF) — says its two daughter funds added $1.496 billion in assets during that week.

The spending increased the two funds’ total funding to $1.801 billion, from $305 million a week earlier.

Resources

  • Links to the H.4.1 releases are available here.
  • An article about the Secondary Market Corporate Credit Facility coming to life is available here.

The Federal Reserve Board included those Corporate Credit Facility portfolio figures in a regular weekly H.4.1 release posted on the web Thursday. The H.4.1 release lists factors affecting the reserve balances of depository institutions and the condition of the Federal Reserve Banks.

The Fed included its first disclosure on the Corporate Credit Facility portfolio in the H.4.1 release that came out last week.

The Background

The New York Fed announced the birth of the Corporate Credit Facility in March, as turmoil related to the COVID-19 pandemic was hurting private employers’ ability to borrow money by issuing new bonds, and hurting the ability of life insurers, pension plans and other investors to sell existing bonds.

Officials call the market that companies use to issue new bonds the “primary bond market.”

The market investors use to buy and sell existing bonds is called the “secondary market.”

The New York Fed has said that it will put $75 billion in U.S. government cash into the Corporate Credit Facility, and that it has already put $37.5 billion into the facility.

The New York Fed has not said how it is splitting the $37.5 billion between the SMCCF and PMCCF. The new H.4.1 release does not show much of the $1.801 billion in Corporate Credit Facility portfolio came from the SMCCF and how much from the PMCCF.

The New York Fed has hired BlackRock to manage the SMCCF and the PMCCF. The New York Fed has said the SMCCF will start by shoring up the secondary bond market by buying bonds and exchange-traded funds that invest in bonds from primary bond dealers, rather than in other types of companies, such as life insurers, that use corporate bonds in their portfolios.

At press time, 20 companies had completed the process to get on the Corporate Credit Facility’s eligible sellers list. On Friday, for example, RBC Capital Markets LLC and J.P. Morgan Securities LLC joined the eligible sellers list.

The New York Fed has posted a State Street fee letter showing that the SMCCF will probably pay a relatively high U.S. custody and administration basis point fee, of 0.07 per month, because it falls in State Street’s small, $250 billion-and-under net asset value category.

If the facility can get its assets up to $250 billion, it can get the basis point fee to 0.06  per month.

The U.S. custody and administration maximum fee is $416,666.67 per month.

The New York Fed is supposed to pay its fees by the 15th business day following the end of the calendar month in which the fees were accrued.

The Context

U.S. companies issued an average of about $25 billion in corporate bonds per week through the primary market in 2018, according to calculations based on annual issuance data the Securities Industry and Financial Markets Association (SIFMA) put in its Capital Markets Fact Book, 2019,

Traders averaged about $150 billion in corporate bond trading volume per week, according to calculations based on daily trading data in the SIFMA fact book.

— Read How Fed Intervention Has Saved, but Distorted, the Bond Marketon ThinkAdvisor.

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