The Fed’s plan to experiment with junk bonds set to kick off

By: Auther Bett
Auther Bett
Auther V. Bett, CPA started reporting in the finance and accounting space in 2016. His interests span stocks, bonds,… read more.
on May 5, 2020
  • On March 23 the Fed announced plans to set up various programs to purchase corporate bonds.
  • The programs, according to the Fed, would boost big employers’ access to credit amid the pandemic.
  • The New York Fed on Monday said the programs are set to kick off any time from now.

It’s close to two months now since the Fed stepped up efforts to boost the economy by pledging to establish a first of its kind entity to purchase ETFs and corporate bonds. Junk bond ETFs and junk bonds were later added to that list the by the US central bank.

The impact of the Fed’s promise on the American borrowing markets was profound. Troubled companies such as Boeing (NYSE: BA), Carnival (OTCMKTS: CUKPF) and Ford (NYSE: F) have been able to slam the pandemic and borrow large sums of money.

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The March 23 announcement seems to have rubbed the US stock well too, bringing to end the historical collapse of the country’s stocks. On the same day, the S&P 500 jumped 31% and even after a pullback, it is still 25% above the last significant low.

As per a CNN report of Peter Boockvar, chief investment officer at Bleakley Advisory Group, “central banks are sometimes as effective in their words as they are with actual action.”

The wait is over

Yesterday The New York Fed announced that the Secondary Market Corporate Credit Facilities (SMCCF) is set to begin purchasing the corporate bond ETFs anytime from today. The New York Fed, which is quarterbacking the Fed’s security-buying schemes, also said that the buying of corporate bonds will come soon after launching the corporate bond EFTs program. Another Fed program known as the Primary Market Corporate Credit Facility (PMCCF) will also be launched soon enough.

But despite the dramatic impact of the Fed’s plan to bolster the debt markets, it has not actually started purchasing any bonds just yet.

Billionaire investor Jeffrey Gundlach termed the policy maker’s strategy as “the most effective jawboning success in Fed history.”

The programs, according to the Fed, will assist the big corporations which are also the biggest employers in the US to sail through the current economic plunge.

An online FAQ by the New York Fed noted that “the availability of credit has contracted for corporations and other issuers of debt while, at the same time, the disruptions to economic activity have heightened the need for companies to obtain financing.”

Participants of the programs will need to be US-registered businesses with a majority of employees being American citizens, said the Fed.

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