The Fed will start buying corporate-bond ETFs on Tuesday — launching a key component of its emergency coronavirus response

Liu Jie/Xinhua/Getty ImagesA man wearing a mask walks past the U.S. Federal Reserve building in Washington D.C., the United States, on April 29, 2020.
  • The Federal Reserve will begin buying corporate-bond ETFs on May 12 as part of its widespread emergency relief plan, according to a Monday statement.
  • The ETF purchases were first revealed on March 23. While the program’s unveiling immediately lifted risk assets and boosted investor sentiment, markets have been anticipating its rollout.
  • Most of the fund purchases will focus on investment-grade debt, while a smaller share will seek exposure to high-yield bonds.
  • Direct purchases of corporate bonds will begin “in the near future,” the central bank said Monday.
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The Federal Reserve announced Monday that it will begin buying corporate-debt exchange-traded funds on May 12 to further aid markets buffeted by the coronavirus pandemic.

The ETF purchases were first announced on March 23, when the central bank unveiled its Secondary Market Corporate Credit Facility alongside a spate of emergency lending pools. Though the program’s reveal was enough to lift credit stresses, markets have been eagerly anticipating its rollout as firms grapple with the pandemic’s economic toll.

The facility will buy up funds “whose investment objective is to provide broad exposure to the market” for corporate debt, the Fed said in a Monday statement. Direct purchases of corporate bonds through a separate facility will begin “in the near future,” the authority added.

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The Fed is working alongside the Treasury Department to deploy monetary relief through nine separate facilities. The Treasury funded half of the $US75 billion investment needed for the central bank’s corporate credit facilities, the Fed said Monday.

Most of the ETF purchases will focus on investment-grade debt, while a smaller share will go toward ETFs with exposure to the high-yield bond market. The Fed will consider funds’ management styles, composition, average tenor, average daily trading volume, and other factors when determining facility eligibility.

The central bank called on BlackRock – the world’s largest asset manager – to expedite its purchases. A document detailing the partnership revealed corporate bond purchases will be split into three stages through the facilities’ lifetime. Purchases will first take place in a “stabilisation” phase, then an “ongoing monitoring” phase, and closing with a “reduction in support” phase.

“Once market functioning measures return to levels that are more closely, but not fully, aligned with levels that correspond to prevailing economic conditions, broad-based purchases will continue at a reduced, steady pace to maintain these conditions,” the Fed document said.

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