Liquid Alternatives: The Fed’s “All-it-Takes” Stimulus Includes Purchase of Bond ETFs

March 24, 2020 | Liquid Alternatives

A la Japan, the U.S. Fed stands ready to buy ETFs.

In a move aimed at ensuring liquidity in the bond market and related ETFs, for the first time, the U.S. Fed will purchase corporate bond ETFs. (MarketWatch)

The Fed’s new facilities are the Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issues, and the Secondary Market Corporate Credit Facility (SMCCF), to provide liquidity for outstanding corporate bonds.

The facilities support only investment-grade bonds and are aimed at issues of big corporate employers. The ETFs on the Fed’s shopping list must invest in U.S. investment-grade corporate bonds.

The Bank Of Japan extends similar support to only equity ETFs, however. Earlier this month, the Japanese central bank, in an emergency move, doubled its annual ETF buying plan to ¥12 trillion from ¥6 trillion. The BOJ may soon surpass the Japanese state pension fund, the GPIF, as the largest holder of domestic stocks.

Why the Fed is supporting corporate bond ETFs

The mayhem caused by the coronavirus has upended business prospects for businesses stretching from airlines to energy. Scared, investors have sold off corporate bonds, on concerns that cash flows could dry up and impact their servicing.

Corporate bonds and related ETFs have slumped sharply, sometimes creating pricing anomalies. In one oft-quoted example, the big investment-grade corporate-bond fund iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEARCA: LQD), closed on one occasion about 5% lower than its net asset value.

Moreover, a Goldman Sachs (NYSE: GS) report said high yield bond defaults could surge to 13% by the end of the year. This further unnerved the market.

In these circumstances, the Fed’s credit line could be a valuable steadying hand for the bond market.

The fine print

However, the facility will come with limits as follows:

Limits per Issuer/ETF: The maximum amount of bonds that the Facility will purchase from any eligible issuer will be capped at 10 percent of the issuer’s maximum bonds outstanding on any day between March 22, 2019, and March 22, 2020. The facility will not purchase more than 20 percent of the assets of any particular ETF as of March 22, 2020.

Pricing: The Facility will purchase eligible corporate bonds at fair market value in the secondary market. The Facility will avoid purchasing shares of eligible ETFs when they trade at prices that materially exceed the estimated net asset value of the underlying portfolio.”

Related Story:  Liquid Alternatives: Bank of Japan Beefs Up ETF Purchase Strategy; You Could Too

Free Industry News

Subscribe to our free newsletter for updates and news about alternatives investments.

  • This field is for validation purposes and should be left unchanged.

Alt Insights

January 29, 2020

Venture Capital: The Kobe in “Bryant Stibel & Co”

Venture Capital: The Kobe in “Bryant Stibel & Co”

Latest Alternative Investment News
REITs: Big Insider Buying at Hudson Pacific Properties
April 1, 2020     News, Real Estate

Prices of Real Estate Investment Trusts and real estate operating companies plunged in March. Officers and directors of many REITs have stepped up to buy the shares the public has…
Hedge Funds: Steven Cohen Warns of “Tremors” After the Earthquake in the Markets
April 1, 2020     Latest News, News

Steven A. Cohen, the founder of Point72 Asset Management, warned investors to be cautious about the current market environment. The fund manager suggested that the markets haven’t fully recovered from…
Liquid Alternatives: American Century to Launch Active ETFs That Disclose Quarterly
April 1, 2020     Liquid Alternatives, News

Thursday, April 2, marks the beginning of a new era of active, non-transparent ETFs. In a brave step considering the current market conditions, American Century Investments will launch Thursday two…
Ride Sharing Startup Via Raises $400M @ Valuation of $2.25B
April 1, 2020     News, Venture Capital

Dial-a-shared-shuttle startup Via raised $400 million in a Series E funding round led by Exor (BIT: EXO) at a valuation of $2.25 billion. Exor is a holding company of the…

Scroll to Top