The Fed's cannonball into bond markets drove $1 billion into the world's biggest credit ETF in a single day

ReutersU.S. Federal Reserve Chairman Jerome Powell speaks in Washington

Investors chased newly optimistic corporate credit bets on Monday after the Federal Reserve announced plans to buy up bonds and credit exchange-traded funds.

The iShares iBoxx $ Investment Grade Corporate Bond ETF took in $US1.06 billion as traders looked to outpace the central bank’s purchases and ride a surge in credit health, Bloomberg reported Tuesday. The world’s biggest credit ETF ended the day up roughly 7.4%.

Monday’s inflows were the second-biggest in the ETF’s history, according to Bloomberg, falling $US30 billion shy of its 2016 single-day record.

The Fed took its biggest step yet to support the US economy on Monday morning. The reserve bank unveiled plans to purchase corporate bonds and credit ETFs in an unprecedented step to aid the threatened market. A Secondary Market Corporate Credit Facility will allow the bank to purchase up to 10% of a company’s outstanding bonds and ETFs “whose investment objective is to provide broad exposure to the market for U.S. investment grade corporate bonds,” the bank said.

Limitless Treasury bill and mortgage-backed security purchases will further “support smooth market functioning and effective transmission of monetary policy,” the Fed said in a statement. The Treasury Department will make an initial $US10 billion investment in the facility through the Exchange Stabilisation Fund, the central bank added.


Read more: JPMorgan reveals the 6 issues that will shape the endgame scenario for coronavirus as it derails the financial system – and shares what investors should be prepared for

The coronavirus’s hit to economic activity prompted new worry around firms’ default risks. Traders fled investment-grade and high-yield debt at a record pace in the week ended March 19, Bank of America said in a Friday note. LQD now trades at a 3% premium to its underlying assets after sitting at a 5% discount just last week, according to Bloomberg.

LQD traded at $US116.06 as of 1:05 p.m. ET Tuesday, down about 9.7% year-to-date.


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