Fed to Sell Corporate Bonds and ETFs Purchased During Covid-19 Crisis -- 2nd Update

By Paul Kiernan 

The Federal Reserve will soon begin selling off the corporate bonds and exchange-traded funds it amassed last year through an emergency-lending vehicle set up to contain the Covid-19 pandemic's economic fallout.

The vehicle, known as the Secondary Market Corporate Credit Facility, or SMCCF, held $5.21 billion of bonds from companies including Whirlpool Corp., Walmart Inc. and Visa Inc. as of April 30. In addition, it held $8.56 billion of exchange-traded funds that hold corporate debt, such as the Vanguard Short-Term Corporate Bond ETF.

The sales, which should be completed by the end of this year, are unrelated to monetary policy, a Fed official said. Net proceeds will be remitted to the Treasury Department, which funded the facility's creation.

The SMCCF's corporate-debt holdings are distinct from the more than $7.3 trillion of Treasury debt and agency mortgage-backed securities on the Fed's balance sheet. The central bank under Chairman Jerome Powell is continuing to purchase those types of assets to the tune of at least $120 billion a month to hold down long-term borrowing costs until the economy recovers further from the pandemic.

The SMCCF was set up in March 2020 as part of a broader suite of programs established by the Fed and Treasury to shore up liquidity in financial markets. Stock and bond markets at the time were reeling from the fear and uncertainty regarding the coronavirus and economic lockdowns to contain it.

The Fed's announcement of the facility and a related vehicle, the Primary Market Corporate Credit Facility, quickly restored investor confidence in major corporations' ability to issue debt. As a result, the latter vehicle never made a purchase, and the SMCCF's holdings peaked at around $14.2 billion last year, a far cry from the two programs' combined $750 billion of firepower.

"The SMCCF proved vital in restoring market functioning last year, supporting the availability of credit for large employers, and bolstering employment through the Covid-19 pandemic," the Fed said in a statement Wednesday.

The corporate-credit programs stopped buying assets on Dec. 31 after then-Treasury Secretary Steven Mnuchin declined to extend several of the Fed's emergency lending programs.

In testimony before the House Financial Services Committee last June, Mr. Powell suggested the central bank would likely hold the individual corporate bonds until they matured, rather than selling them back into the market. "We are generally a hold-to-maturity entity," Mr. Powell said in response to a lawmaker's question about the Fed's plans for the SMCCF. "It may be that we sell some back into the secondary market down the road, but ultimately, we're a buy-and-hold buyer," Mr. Powell added.

In Wednesday's statement, the Fed said it plans to sell the bonds and ETF holdings in a gradual and orderly way that seeks to minimize "the potential for any adverse impact on market functioning."

The New York Fed, which manages the SMCCF, will provide additional details soon and before sales begin, the statement added.

Write to Paul Kiernan at [e-mail]

(END) Dow Jones Newswires

June 02, 2021 18:59 ET (22:59 GMT)

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