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The Federal Reserve has announced that it will support the US credit markets by expanding its asset purchase program to corporate bonds and the ETFs that hold them.
The corporate bond markets have been in free fall recently as the magnitude of the impact of the coronavirus on economic growth has questioned the ability of even the most creditworthy issuers to finance.
The $ 30.3 billion IShares iBoxx $ Investment Grade Corporate Bond ETF (LQD US), the largest US-listed ETF to follow investment grade credit in USD, fell 18.8% between March 9 and March 20, 2020.
In Europe, the 4.5 billion dollars IShares $ Corp Bond UCITS ETF ETF (LQDE LN), which shares the same underlying reference, the Markit iBoxx USD Liquid Investment Grade Index, suffered a similar fate.
Liquidity in the corporate bond market has also tightened, causing price dislocation between ETFs and their underlying indices and assets.
Due to uncertainty and liquidity problems in the market, the Federal Reserve made the decision to intensify its intervention in the market following a decision to cut interest rates to almost zero last week.
Two new facilities will be established to manage the Central Bank program – the Primary Market Business Credit Facility (PMCCF) and the Secondary Market Business Credit Facility (SMCCF).
The former will buy newly issued corporate debt securities directly from businesses in the primary markets, while the latter will focus on credit bonds and ETFs traded in the secondary markets. Each program received an initial mandate of $ 100 billion.
The Federal Reserve has not explicitly stated which ETFs it will buy, but noted in a statement that these funds will include “exchange-traded funds listed in the United States whose investment objective is to provide broad market exposure high quality US corporate bonds. ”
The bank will not expand the program to high yield bonds or their ETFs.
Some analysts described the scope of the intervention as modest, given the $ 8 trillion market capitalization of the entire corporate bond market. However, investors reacted positively to the news, encouraged by the Federal Reserve’s willingness to take unprecedented steps to support the economy.
The iShares iBoxx $ Investment Grade Corporate Bond ETF has risen 3.6% so far this week, when the market closed on Tuesday. He also saw more than $ 1 billion in net inflows.
In another indication of its dedication to the markets, the Federal Reserve also announced that it had removed the limit on its purchases of T-bills and mortgage-backed securities from agencies, previously set at $ 500 billion and $ 200 billion respectively.
Ten-year Treasury bill yields fell 0.2%, while the market IShares US Treasury Bond ETF (GOVT US) gained 1.4%.