Federal Reserve to sell ETFs bought during pandemic

Jun 8th, 2021 | By | Category: ETF and Index News

The Federal Reserve has announced plans to start selling its holdings of corporate bonds and corporate bond ETFs as it begins to wind down some of the emergency measures implemented during the height of the Covid-19 market volatility.

Federal Reserve to sell ETFs bought during pandemic

The Federal Reserve has announced it is winding down the corporate credit facilities implemented at the height of the Covid-19 market volatility.

The US Central Bank established two emergency lending vehicles in March 2020 – the Primary Market Corporate Credit Facility (PMCCF) and Secondary Market Corporate Credit Facility (SMCCF) – as a means of supporting US credit markets as they were reeling from the uncertainty caused by Covid-19.

The PMCCF was set up to purchase newly issued corporate debt directly from firms in primary markets, while the SMCCF focused on bonds and credit ETFs trading in secondary markets.

The unprecedented intervention proved to be instrumental in restoring investor confidence and marked a turning point for markets which had been in steep decline over the previous month.

Indeed, the mere willingness of the Federal Reserve to buy corporate credit had such a positive impact that the actual need for it to do so became largely irrelevant. Despite the two emergency facilities having a combined asset purchasing power of $750 billion, the PMCCF was never utilized and the SMCCF, which suspended its operations at the end of last year, contains a relatively modest $5.2bn in corporate bonds and $8.5bn in ETFs.

It is understood that the Federal Reserve will seek to first dispose of its ETF holdings – most of the ETFs purchased by the Federal Reserve provide broad coverage of the US investment-grade corporate bond market, although high-yield ETFs were also bought to a much lesser extent. The sales, which are expected to conclude by year-end, will take into account liquidity and trading conditions so as to minimize the potential for any adverse market impact. Net proceeds will be remitted to the Treasury Department.

The Federal Reserve has noted that the decision to dispose of these assets should not be viewed as a signal of its monetary policy intentions and that it will continue its current purchases of Treasury and agency mortgage-backed securities which amount to approximately $120bn on a monthly basis. Many analysts believe, however, that the Federal Reserve will scale back this buying activity soon as the economic recovery speeds up and the focus switches to managing rising inflation.

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