The Fed announced over two months ago plans for a $250 billion facility to buy corporate bonds in the secondary market, and another $500 billion of new issuance (the primary market). Until Tuesday, the Fed had purchased $3 billion of exchange-traded bond funds under this program, called the Secondary Market Corporate Credit Facility. Yesterday, they officially declared the launch of individual bond purchases and gave details on the program mechanics, whereby they will accumulate a corporate-bond portfolio mimicking a broad, diversified market index of bonds. Any bond that was investment-grade in credit rating as of March 22 is eligible (including those “fallen angels” that have since been downgraded to junk).
This means the Fed can operate as if they are not transacting with the individual companies, which subjects the companies to certain criteria and disclosures, but rather as if it were broad-based and index-like. This satisfies the criteria of the 13(3) provisions and removes a stigma from companies whose debt the Fed buys. Ultimately, it is hard to really explain why they are doing what they are doing . . . because the benefit of it (tighter spreads, more-fluid credit markets) was achieved by the announcement of the program, not the actual purchases they are about to make. This creates the false impression that the buying itself is now obsolete, when in fact, credit levels simply reflect what the Fed telegraphed was coming.
The real takeaway is how indicative this is of the Fed’s commitment to a “anything it takes” approach to monetary policy for the foreseeable future.
