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.