Today, the U.S. Federal Reserve will begin purchasing up to US$250 billion in individual corporate bonds as part of its previously announced measures to backstop corporations and their employees.
The Secondary Market Corporate Credit Facility will begin buying a broad and diversified portfolio of corporate bonds to support market liquidity and the availability of credit for large employers.
In its statement the Federal Reserve said the SMCCF will purchase corporate bonds to create a corporate bond portfolio that is based on a broad, diversified market index of U.S. corporate bonds.
“This index is made up of all the bonds in the secondary market that have been issued by U.S. companies that satisfy the facility’s minimum rating, maximum maturity, and other criteria,” the Fed said. “This indexing approach will complement the facility’s current purchases of exchange-traded funds.”
The Primary Market and Secondary Market Corporate Credit Facilities were established with the approval of the Treasury Secretary and with $75 billion in equity provided by the Treasury Department from the $2 trillion CARES Act announced in March as a response to the COVID-19 pandemic.
An index-based buying strategy assures that the emergency lending facilities will be broad based, and provides a mechanism for the central bank to avoid industry concentration.
The Fed has said that it will slow or even pause daily purchases if market functioning showed improvement.
The announcement of the commencement of purchasing helped U.S. stocks rally on Monday.
The Fed began purchasing exchange-traded funds that invest in corporate debt in May.
