Corrects weekly purchase, total purchase figures, clarifies total of SMCCF from Treasury's equity invesment
The Federal Reserve bought US$1.177bn of exchange-traded fund shares for its secondary corporate bond facility this week, one of the tools it created in March to improve conditions in credit markets that were disrupted by the Covid-19 pandemic.
The central bank bought US$1.177bn in exchange-traded funds for its Secondary Market Corporate Credit Facility in the week ended May 27, bringing its total ETF holdings for the program to US$2.978bn, Fed data released on Thursday showed.
The Fed's latest figures showed a huge overall jump in net portfolio holdings in its corporate bond programs to US$34.853bn from prior week's US$1.801bn.
But the increase largely related to a transaction on May 22 that used 85% of the US Treasury's US$37.5bn equity investment in the facility to add nonmarketable Treasuries to the facility.
Excluding that US$31.875bn addition of Treasuries, the Fed's now holds US$2.978bn of corporate debt in the facility as of Wednesday.
While the Fed program has provided a backstop for the sector, the amount of Fed buying is being outweighed by the huge amount of primary market issuance.
"Corporate spreads have been contracting since the Fed's announcement, but what has kept spreads from coming in further has been the amount of corporate issuance," said Janney Montgomery Scott chief fixed-income strategist Guy LeBas.LeBas said.
Average spreads on US high-grade corporate bonds averaged 190bp on Wednesday, tighter than their recent wide of 401bp in March during the virus-induced market rout, according to data from ICE Bank of America.
Even so, average spreads for the asset class are still wider than the 101bp seen at end of 2019.
Companies have raised more than US$1trn in the investment-grade bond market so far this year, as investors continue to put money to work in the asset class.nL1N2D90Q2
US investment-grade bond funds saw some US$7.502bn of inflows in the week ended May 27, while high-yield funds netted US$6.318bn, Lipper data showed. nL1N2DA20O
The Fed began buying corporate bond ETFs a little over two weeks ago. It does not disclose details on what types of corporate securities it buys.