Federal Reserve makes strong start to ETF buying

May 15th, 2020 | By | Category: Fixed Income

FACTOR INVESTING - THURSDAY 14TH JULY 2022 (08:15-11:30) - THE BERKELEY, LONDON Please join us for our annual factor investing breakfast briefing with participation from MSCI, FlexShares ETFs, Tabula and Professor Stefan Zohren, Deputy Director of the Oxford-Man Institute of Quantitative Finance. Please register now if you would like to attend.


The Federal Reserve kicked off its buying of corporate bond ETFs on Tuesday with over $300 million in purchases on the first day of the program.

Federal Reserve makes strong start to ETF buying

The Federal Reserve kicked off its program to buy US corporate bond ETFs this week.

According to the central bank’s weekly balance sheet update, the Secondary Market Corporate Credit Facility (SMCCF), set up to manage the institution’s ETF investments, recorded an asset level of $305m, as of Wednesday 13 May.

The balance sheet did not indicate which ETFs were purchased, although the Federal Reserve has previously stated it will disclose its holdings on a monthly basis.

Investors will also need to wait until next week’s balance sheet update to see if the Federal Reserve has maintained the tempo of its purchases.

There has been much debate around the likely size and chosen targets of the Federal Reserve’s ETF purchases ever since the central bank announced the program in March.

The decision to support US credit markets by buying investment-grade corporate bonds and ETFs that hold them had an immediate positive impact on market confidence, halting a four-week slide in equity and corporate bond markets brought on by the Covid-19 pandemic.

Equity markets have since recovered over half their losses since bottoming out, lifted on hopes of a quick rebound in economic activity and further assured by the Federal Reserve’s backstop capabilities when it announced in April that it would extend its asset purchase program to include fallen angel bonds and high-yield corporate ETFs.

Appetite for investment-grade corporate bonds has also rebounded strongly with April’s $285m in new issuance setting a monthly record, while May is currently on track to top those levels.

The Federal Reserve’s announcements have also led to a surge of interest in the largest investment-grade and high-yield ETFs as investors attempt to front-run the central bank’s actions. The $45bn iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD US) gathered $8.5bn and $4.2n net inflows in March and April, while the $21bn iShares iBoxx $ High Yield Corporate Bond ETF (HYG US) picked up $3.4bn and $3.7bn in March and April.

Comparable ETFs in Europe, such as the $9.5bn iShares $ Corp Bond UCITS ETF (LQDE LN) and the $4.4bn iShares $ High Yield Corp Bond UCITS ETF (IYHU LN), which track the same indices as LQD and HYG in the US, have experienced broadly similar inflows, in particular LQDE which pulled in $3bn through March and April.

The return of healthy functioning markets has led analysts to question the extent to which the Federal Reserve will pursue its purchases of corporate bonds and corresponding ETFs.

The SMCCF and Primary Market Corporate Credit Facility (PMCCF), which aims to purchase newly issued corporate debt directly from firms in primary markets, have a combined size of $750 billion. While the Federal Reserve has to go through with its promise in order to maintain confidence in its ability to act in the future, the size of the facilities may seem extreme now that markets have already been revived without actual intervention.

Yet that sort of firepower may also still prove warranted as much remains uncertain about the future course of the economy as the world starts to emerge from lockdown. Federal Chairman Jerome Powell recently warned of a slow rebound, while a resurgence in infections and the reimposition of restrictions could have a devastating effect.

Markets seem to be weighing up these risks. The rally in equities and corporate debt has largely stalled over the past week, while industries most hammered by the initial sell-off are once again firmly in the red.

Tags: , , , , , ,

Leave a Comment