Fed corporate bond move relieves potential stigma for companies, say investors

NEW YORK (Reuters) – The New York Federal Reserve’s planned launch on Tuesday of a bond-buying facility could help ease the potential stigma for companies of asking for help and create an important framework for what the central bank steps in to purchase, analysts and investors said.

The Federal Reserve said that, starting Tuesday, it would buy corporate bonds directly through its secondary market corporate credit facility (SMCCF), one of several emergency programs recently instituted by the central bank to improve market functioning in the wake of the coronavirus pandemic.

“They are creating a plan, a framework for what they’re going to do,” said Nick Maroutsos, co-head of global bonds for Janus Henderson. “I’d be more concerned if they didn’t have a framework and they just started buying bonds blindly.”

The Fed’s pledged backstop of corporate bonds has allowed companies to continue borrowing money from credit markets despite the toll of the coronavirus on corporate earnings.

The Fed will buy a portfolio of individual bonds in an index that replicates the broad credit market, focused primarily on high-quality names. The program, which also included buying exchange-traded funds, had previously been announced but required companies to apply for direct bond purchases. On Monday, the Fed removed the need for that certification.

Aneta Markowska, chief financial economist at Jefferies, said eliminating the need for an application was critical. “Most don’t want to be seen as asking the Fed for help, unless things go really wrong. So the change eliminates an important hurdle,” Markowska said.

The change comes after markets were roiled last week following Fed Chair Jerome Powell’s bleak outlook on the U.S. economy and fears of a second wave of coronavirus infections.

John Roberts, U.S. rates strategist at NatWest Markets, said it will now “presumably not be discernible which corporates certified for the program and which did not,” removing a potential stigma.

The Fed declined to comment.

The Fed has also pledged to buy corporate bonds directly from issuers through its Primary Market Corporate Credit Facility, which has yet to launch.

According to Intercontinental Exchange, there are 8,181 investment-grade issues eligible for inclusion in a high-grade U.S. corporate bond index.

The announcement sent the credit market soaring on Monday, with the iShares iBoxx Investment Grade Corporate Bond index (LQD.P) hitting an all-time high of $134.83. U.S. stocks also rallied on the news. On Tuesday morning, the iShares iBoxx investment grade ETF hit a fresh all-time high of $134.9, while the iShares iBoxx high yield ETF (HYG.P) rose as high as $84.33, last at $83.47.

Creating its own index also allows the Fed to avoid potential issues with buying ETFs. The central bank has bought modest portions of ETFs under the aegis of the SMCCF in recent weeks, which has driven the products to trade at a premium to the value of their underlying bonds.

Supporting the market through the Fed’s own index “gives them a straighter shot to buy, to buy in size and to not be accused of overpaying,” said Robert Tipp, chief investment strategist and head of global bonds at PGIM Fixed Income.

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