For the first time in history: Fed begins purchasing corporate bonds

The impact of the coronavirus crisis on the area of economic policy is also reflected in the Fed’s decision to start purchasing bonds from certain companies in order to maintain an adequate level of liquidity in the American economy. Following the announcement in March, the U.S. central bank expanded this week its corporate debt purchase program to include the buying of bonds from specific companies. The difference compared to the previous operations of the program is that the Fed is no longer only purchasing ‘baskets’ of securities known as ETFs (exchange-traded funds), but is also creating its own portfolio of bonds by selecting individual companies. Such purchases will be conducted anonymously so that the companies whose debt the Fed buys are not placed in a disadvantageous market position, or to avoid the impression that they are facing serious liquidity problems. Eligible are bond issuers that had an investment-grade credit rating before March 22 of this year and that, at the time of the bond purchase, have at least a BB-/Ba3 credit rating. Likewise, the bonds can have a maximum remaining maturity of five years.

The Secondary Market Corporate Credit Facility (SMCCF), an instrument that the Fed will expand by purchasing the debt of individual companies, is limited to a total of $750 billion in corporate debt, and was announced back in March as a completely new approach to injecting liquidity into the economy. The intention of the central bank is to ensure that selected companies have enough money during the crisis by purchasing longer-term debt, regardless of whether they currently need that money, and the plan is also to further expand the existing debt purchase program on the secondary market to include the purchase of fresh debt on the primary market.

Since the last crisis, the U.S. central bank has drastically expanded its scope of action compared to the usual operations of central banks primarily aimed at curbing inflation, so the decision made in March is not surprising even though it is yet another unconventional move. The Fed actively participates in controlling unemployment, and this decision is interpreted in that light, as a sort of insurance that maintains the employment rate through the liquidity of the private sector. The range of action in this crisis has indeed reached impressive levels as the Fed intends to lend money to both small and medium-sized enterprises, as well as to local government units, from federal states to cities and counties. The European Central Bank, by the way, has been purchasing corporate debt for years, so this is a rare case where the Fed is lagging behind its European counterpart, but the move is not surprising as central banks have long been practicing things that were previously unimaginable, such as this kind of primary money issuance.

As Bloomberg notes, the problem is not starting to buy corporate debt, but stopping, as evidenced by the example of the ECB. Shortly after attempting to break this unhealthy habit, the ECB had to return to it as the market almost immediately reverted to the same position it was in before the start of the program. However, as the coronavirus has inflicted economic damage of unprecedented scale, few are concerned about what will happen later.

{embed_digitalno_izdanje}{/embed_digitalno_izdanje}