The Fed Bought No Bond ETFs (None, Zero, Zilch) in August. ETF Holdings Actually Fell. Bought Almost No Corporate Bonds

The Fed stepped away from the market after its jawboning created the biggest bond bubble ever.

By Wolf Richter for WOLF STREET.

The Fed started buying corporate bond ETFs for the first time ever in May and corporate bonds for the first time ever in June. These programs had been ballyhooed with enormous fanfare in the media – that the Fed would load up its Special Purpose Vehicles (SPVs) with $750 billion of corporate bonds and bond ETFs, including junk-bond ETFs.

These pre-announcements and announcements and announcements of expansions of prior announcements triggered the biggest corporate bond bubble and junk bond bubble in history before the Fed even started buying.

Bond prices surged and yields plunged and ETFs soared, and junk bonds soared and their yields plunged, and junk-bond ETFs soared as everyone was trying to front-run the Fed’s massive purchases.

So the Fed accomplished its handiwork – creating a bond bubble and bailing out asset holders during the worst economy of in a lifetime – mostly by jawboning, and actually bought very small amounts of bonds and bond ETFs through July. It really just dabbled in them.

But then Tuesday afternoon, the Fed disclosed that over the period of July 31 through August 31:

1. It bought no bond ETFs – and I mean, zero, none, zilch, nada, null. And its spreadsheet was devoid of the usual entries of names, tickers, CUSIP numbers, dates, and mounts. Instead, it said, “No purchases were made over the current reporting period.” The Fed had not bought a single share of anything, not even symbolically. Screenshot of the spreadsheet:

2. Its bond ETF holdings actually fell by $64 million, or by 0.7%, over the period through August 31, to a total of $8.67 billion, as the market value of these ETFs ticked down a smidgen.

This ETF debacle comes after the Fed had only bought $520 million in bond ETFs in July, in a sign that it was already winding down this operation.

3. It bought almost no corporate bonds – and I mean, just a minuscule $456 million with an M, of corporate bonds, which by Fed standards – having tossed out the number $750 billion with a B and measuring its balance sheet in Trillions with a T – is not even a rounding error.

4. Its holdings of corporate bonds ticked up even less because about $21 million of previously purchased bonds matured and were redeemed by the companies, and the total balance of its corporate bond holdings increased over the period by only $435 million, to a total of $3.99 billion.

The Fed’s total corporate bond and bond ETF holdings rose by only $370 million over the period, to $12.66 billion – a far cry from the hoped for $750 billion.

The Fed’s jawboning had done all the heavy lifting. It created enthusiasm for even risky bonds, and the Fed, by just using its “communication tools,” as it likes to say, was able to manipulate the entire bond market into a frenzy.

For example, the junk-rated Ford Motor Co. bonds show how little the Fed bought, inconsequential amounts essentially, but those bonds soared anyway, and the yields plunged, thanks to jawboning.

The Fed holds $15.5 million in bonds issued by Ford Motor Co., spread over two bonds, a two-year note and a five-year note, that Ford issued on April 22, 2020. The Fed accumulated its position in various smallish trades over time. Ford is junk rated because it had enormous problems and huge losses before the Pandemic, and then the Pandemic made everything a whole lot worse.

The Ford five-year 9.0% notes, CUSIP number 345370CW8, traded at a yield of 10.2% shortly after being issued on April 22. Then, amid announcements and hope-mongering about the Fed’s entry into the corporate bond market, the price began to surge and the yield began to drop.

One of those trades in the five-year 9.0% notes, according to the Fed’s data disclosed a month ago, took place on July 2 for $2.2 million. The Fed paid 109.2 cents on the dollar. The bonds then soared to 119 cents on the dollar by August 10, for a yield of 4.3%. That’s less than half of the yield in April! Since then, the bond has backtracked and on Tuesday closed at 114 cents on the dollar, for a yield of 5.39%. (Chart via Finra-Morningstar):

This shows how powerful the Fed’s tool of jawboning is. And it also shows that the Fed doesn’t think it’s necessary to drive the credit market bubble any further. Fed Chair Jerome Powell has explained this many times – that the Fed has succeeded in achieving its objective of creating loose credit market conditions. It has in fact succeeded in blowing this bubble in the shortest amount of time, and the Fed itself is perhaps stunned by the magnitude of the bubble and its own success. And it stopped buying ETFs in July, and it trimmed it corporate-bond purchases to near nothing.

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  57 comments for “The Fed Bought No Bond ETFs (None, Zero, Zilch) in August. ETF Holdings Actually Fell. Bought Almost No Corporate Bonds

  1. crv says:

    Will the bluff work the next time or the time there after?
    At some moment in time this bluff will be called.

  2. Tinky says:

    Wolf –

    Your perspective on the power of the Fed’s jawboning has been remarkably accurate, and an eye-opener to some us who read your work. At the same time, however, it does seem, perhaps, like a bit of a distinction without a difference, given that, in a sense, the Fed IS actually willing to step in and buy when stocks or bonds decline sharply, putting a “floor” in the markets, at least in the minds of investors.

    So while it may not be necessary for the Fed to continuously buy in order to catalyze sharp moves up, as you have amply demonstrated, many investors are likely relying not only on the above-mentioned “Fed floor”, but the anticipation that the floor will continue to move up over time. Higher highs, less low lows, so to speak.

    Now, whether that strategy will work is a very different matter, of course.

    • Fat Chewer. says:

      The markets need confidence to trade and when confidence drops it’s the Fed’s job to revive that confidence.

      They certainly achieve that, but the means by which they do it have to be different every time because every crisis of confidence is slightly different. Currently, big announcements of doing whatever it takes are in fashion until some new idea pops up.

      Bernanke used to talk the market back to confidence. It was thick technical mumbo jumbo, but it worked. Carefully selected phrases that traders needed to hear were woven into the mumbo jumbo. In hindsight, it was probably telling them that they would be made whole again.

      It’s not difficult because the market wants to move. In a way, the traders believe the Fed because they have little choice. It’s either believe the Fed or jump out the window.

      • Fat Chewer. says:

        Oh, by the way, it will end the day the markets simply cannot believe the Fed. As many here have said that will be when the rest of the world loses confidence in the US dollar. A day we should all hope never happens.

        This usually comes to pass from high level changes in things that don’t move quickly, and are also deep in the background, but move the entire world when they do, such as global wealth and population distributions. Which together mean changes in global market power. Unfortunately, it seems at this time that they are irrevocably changing and time for us to deal with it is running out. With our incredibly low birth rates, it is inevitable.

        I have come to believe that neoliberalism is some form of birth control because with user pays for everything, children are expensive.

        • Harrold says:

          Thats a feature.

        • Paulo says:

          Why shouldn’t we hope the US dollar loses reserve status? Not everyone who reads WS is in the US. I hope it loses that position and feel it is long overdue. It is about time for a comeuppance with all the meddling for slothful and entitled corporate interests, imho.

        • sunny129 says:

          @Paulo

          ‘I hope it loses that position’
          ??
          Replaced by which currency? Euro? Yen? Yuan? Rubel?

    • RightNYer says:

      Is that so? Is the Fed REALLY willing to step in and buy trillions if that’s what it takes? Investors are buying bonds as though they are, but I think there’s a big disconnect between what the Fed claims it’s willing to do and what it actually is. And much of that is due to political pressure.

    • This whole episode of panicked bond buying as the American economy craters some 25% raising default risk through the roof, IS A TEXTBOOK EXAMPLE OF THE LACK OF RESEARCH TODAY’S INVESTORS DO BEFORE BUYING ANY BOND OR BOND ETF AND DEFINES A SPECULATIVE BUBBLE TO A “t”. The U.S. economy, with whole industries going into failure mode, argues for higher yields, not lower yields, and with a Dollar destined to swirl down the historic toilet of failed currencies with rampant Fed and Uncle Sam money printing, inflation risk also argues for higher yields, not lower. If you have a dumb buyer like the Fed, let them buy your grossly overpriced bonds of today. The Fed has ruined capitalism in America and needs to be shut down, jawboning or not.

  3. Barry says:

    Wasn’t Black Rock given the power to buy with the SPV to buy their own ETF book.?

    • historicus says:

      Great question. Answer is………….

      • Fat Chewer. says:

        Probably. If your contention is that Blackrock is a corrupt vehicle to make the rich richer, then definitely.

      • The answer is “yes” and why Blackrock over other Financial Squid on Wall Street? The Fed has a legal department and I am sure they were advised that they tread on illegal grounds in doing what they have done and what they have proposed to do. Great case for the Supreme Court.

        • Escierto says:

          The Supreme Court? Now that’s a good one! Hilarious.

        • Implicit says:

          Collusion of the rich (Fed and Blackrock), with their huge legal and accounting support being sued by not rich people, hoping not to get “Snowdened” for speakng out for the masses. Moral ambivalence of knowing you cannot win even though you should.

        • RightNYer says:

          The same Supreme Court that upholds any gun law, no matter how ridiculous, while allowing cops to get away with anything based on “qualified immunity?” LOL.

          The SCOTUS is a branch of government, that protects other branches of government.

  4. Taps Coogan says:

    What a world we live in where $12 billion of printed money to corporations is just jawboning. And your right, it is essentially just jawboning.

    But the biggest bond ETF in the country ‘only’ has about $50 billion of net assets, so it’s not nothing either.

  5. Lance Manly says:

    They can pat each other on the back for creating zombie corporations. Maybe the Fed should start jawboning the bonds of shale companies lower while they are at it.

    • rhodium says:

      The term jawboning originates in the Bible when Samson slays thousands of Philistines with a donkey’s jaw bone. As far as I’m aware, Jerome sees himself as Samson and just about anything that can have the monetary shit beaten out of it as a proper target. That particularly includes the middle class, the fed’s philistines. It’s not even ironic that philistine is also used as an insult for someone who is a stupid oaf. We’ve been turned into fools struggling for a good idea of where to stash our money. Nothing is rational, everyone is just stumbling in fear (fomo or bubbles) away from the jawbone.

  6. Joe in LA says:

    Well, the difference now is that the SPVs are actually in place to do the dirty work. When there is a sharp decline in bond prices, there is no reason to believe Powell will not try to re-animate the zombie again.

    This is all Powell has — endless cheap money to banks and corporations. That’s it, that’s the entire plan. There is also no possibility that this will create money velocity, which has been on a 40 year decline, basically tracking declining tax rates.

    Powell will ride this trickle-down beast to its ugly end, ever the servant of corporate oligarchy. Bubble, pop, bubble, pop, bubble….

    • historicus says:

      You can’t taper a Ponzi Scheme.
      And the Fed should always be held to true transparency. Their partnership with Blackrock, remarkable in it being accepted without question, opens new avenues for the Fed not readily ascertainable to outsiders. Likely by design.

      • YuShan says:

        “Their partnership with Blackrock, remarkable in it being accepted without question,”

        This kind of thing also keeps surprising me. It looks like everybody has already accepted that every “public” service is an oligarchic scam, so no need to question it anymore.

    • happy_man says:

      “endless cheap money” , cheap only to Powell & company.

      I find all this money printing extremely expensive and damaging to my family.

    • The command economy hacks at the Fed cannot create REVENUES for corporate America and that is what is sorely needed in the 2020 Depression. The cost of money is only one aspect of running a business, and reality will eventually sink in, even for Robin Hooders, that the ingredient necessary to service even zero interest rate debt, the need to amortize principal at some point, IS SHRINKING GOING FORWARD in my estimation, AND NOT GROWING AT A RATE NECESSARY TO SERVICE THIS NEW MOUNTAIN OF VERY SHAKY DEBT.

      • RickV says:

        “The cost of money is only one aspect of running a business, and reality will eventually sink in, even for Robin Hooders, that the ingredient necessary to service even zero interest rate debt, the need to amortize principal at some point”

        Not necessarily true for the Treasury. As Bill Fleckenstein pointed out, the Treasury could authorize and issue 100, 200 year, or even perpetual! zero interest bonds that are then swapped for the Feds treasury holdings which are cancelled and presto no more principal amortization! The rabbit hole gets deeper.
        Of course, they would still have to deal with the excess bank reserves, but that’s for another day.

    • Wolf Richter says:

      That’s part of the jawboning story — that the Fed has succeeded in persuading the markets that it will buy whatever. That’s basic market manipulation, and I’ve gotten used to that over the years. As long as the Fed doesn’t actually buy.

      • Very good piece Wolf. I’m glad that I came across your site.
        This time the Fed didn’t need to buy so they didn’t. They will if they have to, as evidenced by the unprecedented runup in their balance sheet. I don’t think it was a bluff.
        If the financial condition of the bottom 70% (or so) isn’t addressed, the Fed will have little choice but to continue its purchases, and federal deficits will have to ramp up to match the Fed’s efforts. Until the game dies of natural causes.
        This could go on for at least ten years. IMO.

        • Wolf Richter says:

          Jawboning is not a “bluff” — never has been. Different concepts. It’s the single most important policy tool the Fed has, meaning talking markets to where the Fed wants them to go.

    • Ralph Hiesey says:

      Does this not suggest that something similar could be happening causing the “irrational” stock market behavior seen for the past six months? Which coincidentally is one of Trump’s biggest talking points on the “economy.”

      Seems to me this could be done with an SPV with very fast computer trading that does not have the usual objective of trying to make money for the trader, but whose only objective is to artificially raise the value of the market while incurring minimal losses for itself.

      If the computer had instant information on every “ask” and “bid” on the market, and made just the right purchases to get the biggest market price jump per dollar spent, seems to me a fast computer could accomplish this with minimal cash expense.

      I’ve long wondered why the market, at about an hour before close on a day when the market has gone down, seems to amazingly jump up just enough to make for a small positive gain for the day.

  7. Michael Engel says:

    1) Yesterday, the Nasdaq bar was less than 50% of the previous bar on slightly lower volume.
    2) The Nasdaq closed under dma50 for the first time since Apr 7, 5M ago.
    3) It’s a warning sign. Yesterday low was under Aug 7 high.
    4) Yesterday, IWM half size bar on the same volume also closed the open, leaving behind a buying tail.
    6) Aug 12 is a failed spring. It didn’t send gold to a new all time high.
    7) Since Aug 12 gold is building a cause. It will be a larger cause.

  8. Michael Engel says:

    Thanks for the free TA salad barbar.

  9. David Hall says:

    The 10 yr treasury yields about .69%. I remember when one year CD’s were paying 5%. If that happens again these junk bonds really will be junk.

    • Petunia says:

      These treasury yields are worthless to the average investor. The big boys can cover the cost of parking and transacting with this yield but for the average investor it is a worthless trade.

      The average investor would be better off with money in the mattress and curtailing their starbucks habit, the payoff will be larger.

  10. I don’t feel comfortable in the midst of this manipulation. I trade now, exclusively. I have no confidence in a market that moves on the whims of politicians.
    So far this year it’s been SPY straddles for me but I’ve been in cash since Friday. I’ll wait until a little more premium comes out of options and go back to straddles. They’re firmly in my comfort zone and should keep making money, as movement is pretty well baked in.

  11. Yertrippin says:

    And….. somebodies buying the dip once again. That little drop is just a memory- to the moon we go!

  12. Point being the Fed issued an IOU and they can print money based solely on their expectations. Just like they dropped rates when the trade war rhetoric heated up. We have seen this good cop bad cop game before. Prez makes the threats and Fed pumps the money. Blink twice if you think they aren’t going to do it.

  13. lenert says:

    Money supply is up parabolically. Money velocity is down parabolically.

  14. Jdog says:

    It’s jawboning is a powerful tool as long as people have faith in it. At some point that faith will be proven unfounded, and then the reckoning will occur.

    • RightNYer says:

      And people will only have faith in it for so long as the dollar retains its reserve status, and value. After that point is passed, no one will lend money to be repaid in devalued dollars 30 years later.

      • sunny129 says:

        ‘so long as the dollar retains its reserve status, and value

        No other currency is in a position to replace US $ in the near future either as a global commerce currency or the dominant currency in the foreign currency mkts!
        Of the purchasing power is being eroded everday by inflation no matter how small. with inflation around 2.0% (mostly real one is above 5%!) and the Fed rate at 0.25%, the REAL rate is around NEGATIVE 1.5%!

      • Kasadour says:

        Oilprice posted an interesting article back in August about the dollar’s decline from its March rally, and how this effects or will effect its reserve currency status.

  15. Yancey Ward says:

    Yeah, I have watched article after article written about all the Fed’s bond-buying when all you have to do is look at the actual data to understand the Fed ended doing all of that back in April/early May, and was only buying treasuries and goverment backed mbs.

    Your site has become my favorite economics stop, Wolf.

    • sunny129 says:

      Even those who got on the train of Corp credit Bond ETFs just on ‘jaw boning’ by Fed rode the wave since early April.

      LQD (3.03 yield), HYG (5.3%)and JNK(5.7%) – all within less than 0.5% from their 52 wk high. Same with BlackRock’s high yield ETF – HYT ( 8.5%). Total return vary (April- Sept ’20)
      Not bad for riding the ‘jaw boning’ horse!

  16. Curious Spectator says:

    The minuscule purchase of $456 million makes the corporate bond purchase more suspect. If it was $456 billion I would think that, in their misguided way, they were trying to help the Market.
    $456 million, on the other hand, is not enough to provide liquidity or prevent the market from binding up or move inflation. $456 million is enough to bail out a friend who is on the losing end of a fallen angel trade or in some other trouble. It is such a small amount that no one will look to close. But those bonds have to be bought from someone, and with an amount that small it is likely only bought from a select someone who is likely sleeping with the Fed buyers (figuratively or literally). If I had any training in forensic accounting I would look into this. Luckily I don’t have that skill because I don’t want to be Epstein.

    • Wolf Richter says:

      Curious Spectator,

      You can check the individual bond trades the Fed did in August. It did about 242 trades, each in the range of $1-$5 million each, across corporate America. Just about all the big-name companies are in it from AbbVie to Zoetis. You can actually look at each trade, including date of trade, price paid, amount purchases, CUSIP number, etc.

  17. David H says:

    Wolf – could it be because they are anticipating getting an agreement on further stimulus in Washington, and also the huge cash pile in the TCB that they have to inject into the economy when they are allowed by congress to do so? Add to that the money in mutual funds and say in retail investors accounts and we have enough liquidity for the next 10 years!

  18. Sir.PiratePapirus says:

    To be sure Wolf it’s much more than expectations managing. Don’t forget the broader context of where everything else was priced, and what took place during the mini crash. Without the backdrop of treasury yields yielding nothing, and corporate debt in general crashing the way it id, you would not have had a rally in junk regardless what the Fed had said. The Fed managing expectation more often than not comes after the fact. It is not to say that it is not a factor, but usually those expectation managing exercises from the Fed amount to mostly providing another reason to do what one would have done anyway at some point, the Fed being the catalyst. There is a question against this point that goes something like.. “Would junk be where it is if it wasn’t for the Fed managing expectations?” It would not, but a broader and more realistic question is “What was junk doing pre covid? The answer is it traded where it is now, one could say well…there was no virus risks then, however there was a similar amount of balance sheet risk even then as there is now. It seems that yields for corporate debt no matter the rating are going lower because of something much bigger, and that in my mind is the fact that there is no where else to put money, the Fed has depressed yields for treasuries and credit across the board and so has the ECB BOJ long time ago, with fewer and fewer opportunities to put money at work and have something to show for, it is understandable that money would then enter into riskier trades in junk. Managing expectations at this point is like a magician who has prepared for a month all his contraptions, who then casts a spell for 5 seconds to mesmerize everybody. It is the skills with the contraptions that matters not the spell.

  19. MonkeyBusiness says:

    Still think the Fed will end up with 10 trillion in their balance sheet before the end of the year.

    A lot of the dollars will head overseas though.

    • Wolf Richter says:

      MonkeyBusiness,

      It better hurry up because that’s where it is right now — hung up on $7 trillion:

      • Happy1 says:

        But the question is what the Fed would do if the market drops 50% again. I think we all know the answer now, massive intervention.

  20. MonkeyBusiness says:

    I always love it when Yahoo Finance comes up with headlines like the following: “2 reasons fears of a dot-com style tech bubble are overblown”.

    “Companies are making money”. So? Cisco, Microsoft, etc were all making money too back in 2000. And right now we have plenty of unprofitable companies like Uber, Lyft, etc.

    And of course, there’s the whole P/E.

  21. SeanW says:

    Hi, I saw your recent interview with Chris Martenson at Peak Prosperity and visited your site. In this article, under point 1, “It bought no bond ETFs”, you show a screenshot of a spreadsheet. How would I see that or see a list of the securities that have been purchased by the Federal Reserve?

    • Wolf Richter says:

      SeanW,

      I linked the PDF from the Fed in the article. Click on it. It has a link in it that gets you to the summary page. There is a link where you can download the spreadsheet and see all the details.

  22. harry hv says:

    Are we talking about the Fed or the Blackrock SPV here? And can we smell a situation where Blackrock is buying and if it goes up they keep it but if it goes down it’s delivered into the SPV? For example, in a month where bonds went up the SPVwill be unchanged?

Comments are closed.