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Managers of Fed's New Bond Facility Like Health Insurer Bonds

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The Federal Reserve Board is creating its own investment-grade bond index fund, and bonds issued by large health insurers make up about 10% of the $429 million in bond holdings.

Managers of the Fed’s Secondary Market Corporate Credit Facility (SMCCF) are setting up the fund.

Here’s what the SMCCF Broad Market Index has spent on bonds from four large health insurers, according to a SMCCF program tracking spreadsheet the Fed posted on its website Sunday:

  • Anthem Inc: $13 million
  • CVS Aetna: $7.8 million
  • Humana Inc: $4 million
  • UnitedHealth Group Inc: $16 million

The SMCCF index fund managers did not report any investments in bonds issued by life insurers in the spreadsheet posted Sunday.

On June 5, when the Fed posted an earlier SMCCF Broad Market Index spreadsheet, that spreadsheet showed bonds from many life insurers and specialty health insurers, such as Aegon, Aflac, AIG, Lincoln National Corp. MetLife, Prudential, Unum and Voya, along with health insurers.


  • Links to SMCCF documents, including the June 28 spreadsheet showing “SMCCF transition-specific disclosures,” are available here.
  • An article about the Secondary Market Corporate Credit Facility coming to life is available here.
  • An article about the Fed’s first bond purchaser disclosure is available here.

The fund had reported some investments in pharmaceutical companies, including $5.3 million in bonds from Gilead Sciences Inc., and $5.2 million in bonds from the company that owns the Walgreens drug stores.

The current size of the SMCCF index fund is much smaller than the SMCCF’s investments in exchange-traded funds (ETF) that focus on investing in investment-grade bonds.: The Fed SMCCF tracking spreadsheets shows that the SMCCF has ETF investments with about $6.8 billion in market value, as of June 18.

Why Care About Bonds?

Health insurers care about bonds because they borrow money by issuing bonds. Cigna Corp., for example, used $20 billion it borrowed by issuing bonds to pay for acquiring Express Scripts Co., a large pharmaceutical benefits managers.

Life insurers care about bonds because, they use huge holdings of corporate bonds to support life insurance, annuity, disability insurance and long-term care insurance benefits obligations.

Regulators discourage life insurers from investing much in common stock, because of concerns about what might happen if the stock market went down at the wrong time.

The U.S. federal government and healthy state municipal government borrowers tend to pay very low interest rates on their bonds.

To try to balance the need for decent investment returns against the need for investment yield stability, life insurers tend to focus on investing in “investment-grade corporate bonds,” or bonds issued by companies with strong credit ratings.

In the first quarter of this year, U.S. life insurers had about $3.1 trillion of their $8.3 trillion in corporate and foreign bonds, up from $2.9 trillion a year earlier, according to the Fed U.S. financial accounts report for the first quarter.

Life insurers held 46% of the $6.8 trillion in corporate debt security liabilities that show up in the Fed financial accounts report.


One arm of the Federal Reserve System, the Federal Reserve Bank of New York, started the SMCCF, along with other programs, to try to keep fear of COVID-19 from freezing and destroying the U.S. bond market, and from destroying a source of financing that employers might use to keep employees on the payroll.

Finance people use the term “primary market bonds” to refer to new bonds that a large company might use to borrow money.

The term “secondary market” refers to an arrangement participants use to buy and sell things that are already on the market.

A used bookstore is a secondary market for books that people have already bought from Amazon or Barnes & Noble.

A garage sale is a secondary market for toys and clothes that people bought from the store.

The secondary market for bonds is the community investment dealers, mutual fund companies, pension funds, life insurers, and other players use to trade bonds that already exist. The players in the secondary market aren’t lending money directly to companies like Anthem or Gilead, but they help Anthem and Gilead borrow money, by showing everyone that investors that buy new bonds from Anthem and Gilead will have an easy time selling the bonds to other investors.

The Fed refers to how easy it is for investors to sell their assets as “liquidity.”

In March and April, many investors were so worried about what COVID-19 and shelter-in-place rules might do that they began racing to convert bonds and other assets into cash. Bond market liquidity indicators deteriorated sharply.

The Fed tried to stabilize the bond markets and other markets by establishing a number of different investment funds, to keep the markets moving by making purchases when no else is making purchases.

For the bond market, the Fed has established the Primary Market Corporate Credit Facility (PMCCF) and the SMCCF.

The Fed has hired BlackRock to run the SMCCF. The SMCCF is supposed to invest mainly in bonds issued by companies that had investment-grade credit ratings up until Marc 22, when COVID-19 along, and in ETFs that invest mainly in investment-grade bonds.

The $75 billion allocated for the PMCCF and the SMCCF comes from the U.S. Treasury Department.

BlackRock worked to get the program off to a fast start by pumping cash into ETFs.

At this point, the idea that the SMCCF is around might be helping to keep the corporate bond market liquid, but its purchases and total size appear to be small relative to the size of the U.S. corporate bond market.

A bond market report from the Securities Industry and Financial Markets Association (SIFMA) show that trading volume for investment-grade U.S. corporate bonds averaged about $27 billion per day in May. That suggests that the SMCCF may be accounting for less than 1% of trading volume.

The SMCCF’s asset total is comparable to the asset total of Horace Mann’s life insurance companies.

The Fed has noted that the SMCCF will try to make bond purchases that reflect weights in a weighting index it publishes monthly, but that actual bond holdings will probably differ somewhat from the weighting index, especially in terms of the actual bond holdings’ maturity profile.

“The maturity profile of the purchases is expected to be several months longer than the index’s maturity, as the SMCCF will likely underweight purchases of bonds maturing within six months of the data of purchase,” according to a New York Fed “frequently asked questions” document.

The SMCCF Broad Market Index

Life insurers use many different kinds of investment indexes in indexed life insurance and annuity products.

Pacific Life, for example, sells products based on the BlackRock Endura Index.

One open question is whether the SMCCF Broad Market Index is much different from existing bond market index programs, and, if so, whether life insurers could offer crediting rate options tied to the performance of the SMCCF Broad Market Index, just as they now offer crediting rate options tied to the performance of the S&P 500 index.

One obstacle to commercializing the SMCCF Broad Market Index is that the SMCCF is supposed to shut down Sept 30, but the Fed and the Treasury have the ability to extend the life of the SMCCF, and many other “temporary” federal government laws and programs have lasted for decades.

— Read New Fed Bond Market Stabilization Fund Goes Shoppingon ThinkAdvisor.

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