The Federal Reserve said a facility designed to purchase eligible corporate debt from investors will launch Tuesday, bringing a key part of the U.S. central bank’s emergency coronavirus lending program online following weeks of anticipation.
The so-called Secondary Market Corporate Credit Facility will begin purchases of eligible exchange-traded funds invested in corporate debt on Tuesday, the New York Fed said Monday on its website. It was first announced in March and has played an important role in keeping financial markets relatively calm since then.
Another facility designed to buy debt directly from issuers -- the Primary Market Corporate Credit Facility -- will launch “in the near future,” according to the announcement.
Congress allocated $454 billion in equity to backstop the Fed loans as part of the more than $2 trillion economic relief package passed in March. The secondary market facility is the first Fed program using funds from the stimulus law to get going. Fed officials first announced the creation of the corporate credit facilities on March 23.
Treasury backing
The New York Fed said the Treasury Department had made $37.5 billion of the $75 billion equity investment it will make in the special purpose vehicle established by the central bank to undertake the primary- and secondary-market credit facilities. Treasury Secretary Steven Mnuchin said earlier Monday he had sent the Fed money for the program.
The “preponderance of ETF holdings” will consist of those mainly exposed to U.S. investment-grade corporate bonds, with the remainder largely exposed to U.S. high-yield corporate bonds, the New York Fed announcement said.
Other factors being considered for eligible ETFs include the composition of investment-grade and non-investment-grade rated debt, the management style and the amount of debt held in depository institutions.
BlackRock agreement
The New York Fed also posted to its website the investment management agreement with BlackRock, the asset management giant it retained to administer the program. The document offered more information on the strategy the Fed would pursue.
Corporate-debt buying, including via ETFs, will occur in three stages, according to the agreement: a “stabilization” phase, an “ongoing monitoring” phase, and a “reduction in support” phase.
“Purchases will be focused on reducing the broad-based deterioration of liquidity seen in March 2020 to levels that correspond more closely to prevailing economic conditions,” the document said. It listed an array of metrics that would guide investments, including transaction costs, bid-ask spreads, credit spreads, volatility and “qualitative market color.”
“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 document said.
The corporate credit facilities are among the nine emergency lending programs the Fed is rolling out to help cushion the blow to the U.S. economy from the pandemic and keep credit flowing. They mark a dramatic escalation of the central bank’s interventions in financial markets by stepping into corporate debt -- potentially including the purchase of some sub-investment-grade securities -- for the first time since the 1950s.
More information on corporate bond purchases by the secondary and primary facilities is “forthcoming,” the New York Fed announcement said.
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