Fed Says It Will Begin Purchasing Corporate-Debt ETFs on Tuesday
Bloomberg
Published May 11, 2020 08:48PM ET
Updated May 11, 2020 09:09PM ET
Fed Says It Will Begin Purchasing Corporate-Debt ETFs on Tuesday
(Bloomberg) -- The Federal Reserve said a facility designed to purchase eligible corporate debt from investors will launch on May 12, bringing a key part of the U.S. central bank’s emergency coronavirus lending program online following weeks of anticipation.
The so-called Secondary Market Corporate Credit Facility will begin purchases of eligible exchange-traded funds invested in corporate debt on Tuesday, the New York Fed said Monday on its website. It was first announced in March and has played an important role in keeping financial markets relatively calm since then. Another facility designed to buy debt directly from issuers -- the Primary Market Corporate Credit Facility -- will launch “in the near future,” according to the announcement.
Congress allocated $454 billion in equity to backstop the Fed loans as part of the more than $2 trillion economic relief package passed in March, and the secondary market facility is the first Fed program using funds from the stimulus law to get going. Fed officials first announced the creation of the corporate credit facilities on March 23.
Treasury Backing
The New York Fed said that the U.S. Treasury Department had made $37.5 billion of the $75 billion equity investment it will make in the special purpose vehicle established by the central bank to undertake the primary- and secondary-market credit facilities. Treasury Secretary Steven Mnuchin said earlier on Monday he had sent the Fed money for the program.
The “preponderance of ETF holdings” will consist of those mainly exposed to U.S. investment-grade corporate bonds, with the remainder whose prime objective is exposure to U.S. high-yield corporate bonds, the New York Fed announcement said.
Other factors being considered for eligible ETFs include the composition of investment-grade and non-investment-grade rated debt, the management style and the amount of debt held in depository institutions.
Blackrock (NYSE:BLK) Agreement
The reserve bank also posted to its website the investment management agreement with BlackRock, the asset-management giant it’s retained to administer the program.
The corporate credit facilities constitute are among the nine emergency lending programs the Fed is rolling out to help cushion the blow to the U.S. economy from the pandemic and keep credit flowing. They mark a dramatic escalation of the central bank’s interventions in financial markets by stepping into corporate debt -- potentially including the purchase of some sub-investment grade securities -- for the first time since the 1950s.
More information on corporate bond purchases by the secondary and primary facilities is “forthcoming,” the New York Fed announcement said.
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