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In-House Analysts Assess Two Fed Corporate Bond Rescue Programs

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What You Need to Know

  • The federal government created the Secondary Market Corporate Credit Facility in response to the COVID-19 pandemic.
  • One goal was to make it easy for life insurers and other asset holders to sell bonds when they wanted to sell bonds.
  • The SMCFF bought lots of ETFs for 10 weeks and of individual bonds for just six weeks and lots of bond ETFs for 10 weeks..

The Federal Reserve System probably did a good job of rescuing the U.S. corporate bond markets from the early 2020 meltdown. Nina Boyarchenko and other analysts at the Federal Reserve Bank of New York give that assessment of the Fed rescue program in a new staff report.

Two Fed Funds

The Fed rushed to set up a Primary Market Corporate Credit Facility and a Secondary Market Corporate Credit Facility in the spring of 2020, as the COVID-19 pandemic was causing lockdowns and confusion all over the world.

The two facilities, or investment funds, had $750 billion in purchasing power.

BlackRock was supposed to use that purchasing power to keep bond deals flowing.

The firm was supposed to use primary market facility cash to help companies that were having a hard time finding buyers for new bonds.

The firm was supposed to use the secondary market facility to help traders and investors, including life insurers, that were having a hard time finding buyers for existing bonds.

The secondary market facility was especially important to life insurers, because life insurers hold about $3 trillion in corporate bonds.

Fed Clout

The analysts found that the Fed had so much clout that all it had to do to stabilize the corporate bond market was to announce that it was setting up a stabilization program.

The announcement of the program had a dramatic effect on liquidity and pricing in the secondary market while also reigniting issuance in the primary market,” the analysts write.

The Fed’s primary market facility never bought any newly issued bonds, because no qualified borrower had problems with issuing bonds.

The secondary market facility began buying ETFs in May 2020, and it began buying bonds in June 2020. It ended up making a total of just $14 billion in investments. It completed most of the ETF purchases within 10 weeks — by June 30, 2020 — and most of the purchases of individual bonds within 10 weeks.

But until late 2020, interest rates on investment-grade bonds were still slightly higher than before the pandemic hit.

ETFs vs. Bonds

In the spring of 2020, when the Fed still needed to help stabilize the bond market, “purchases of individual bonds had a larger impact on credit spreads than purchases of ETFs, controlling for market conditions at the time of the purchases,” the analysts write. “This suggests that the pass-through from improvements in ETF market conditions to corporate bond market conditions may not be as strong.”

The Implications

The New York Fed team emphasizes that the Fed was operating under unusual conditions.

“Given the dramatic effect of the announcement of the [secondary market] facility, it is natural to ask if the same results could have been achieved with a smaller facility or without the creation of the primary market facility,” the analysts write.

“This is difficult to know, since the presence of liquidity often forestalls the run in the first place, meaning that the presence of the PMCCF could have bolstered investor confidence in issuers’ ability to refinance and thereby allowed the issuers to access public markets, even though the PMCCF was not accessed,” the analysts say.

Federal Reserve Building in Washington (Image: Shutterstock)