July 14, 2020

Bailout or Backstop? Lawmakers May Focus on Fed’s Corporate Bond Buying

On June 16 and June 17, the only days for which detailed data on individual bond purchases are available, the Fed bought about $429 million in bonds. The largest purchases were of Comcast, the pharmaceutical company AbbVie and ATT bonds.

This does not mean the Fed is deviating from its plan to help your cable provider. On a day-to-day basis, purchases in the secondary program vary from the index based on what is actually available in the market. Detailed data on additional bond buying will be released roughly monthly on the program’s disclosure page, and the index composition will also be updated regularly to make sure it continues to track the market.

So far, aggregate figures on the corporate bond buying program show the Fed bought a total of $8.7 billion in bonds and E.T.F.s through Wednesday.

The Fed’s primary market corporate credit program, which became operational on Monday, could provide more direct financing to companies. The program gives relatively healthy companies a last-ditch option to sell debt straight to the central bank program if they are struggling to raise funding. Unlike in the program that buys already-issued bonds, companies have to opt in to have the Fed buy their new debt. Analysts and the Fed itself expect few companies to do so.

That’s because the program is designed to be a backstop. To use it, a company must check several boxes: The firm must be unable to get “adequate credit” from banks and markets. It must be investment grade — meaning it is seen as a safe bet — or have been downgraded to junk bond status only after March 22. Even the so-called fallen angels — those companies downgraded after March 22 — must retain a relatively high junk bond rating and cannot use the program if they are deemed insolvent.

At the moment, fairly healthy companies are having no major problems issuing bonds, so there is little reason to expect that they would turn to the facility. That said, the program could help businesses to fund themselves if market conditions sour.

Senator Patrick J. Toomey, a Pennsylvania Republican on the oversight commission tasked with monitoring the Treasury-backed Fed lending programs, has questioned why the Fed is buying already-issued corporate debt at all, given how much markets have calmed down.

Article source: https://www.nytimes.com/2020/06/30/business/economy/federal-reserve-jerome-powell-corporate-bonds.html

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