Another market support gets pulled away and turned upside down.
By Wolf Richter for WOLF STREET.
The Fed announced late Wednesday that it will unwind one of the most iconic bailout facilities of the Pandemic era, namely its holdings of corporate bonds, junk bonds, bond ETFs, and junk bond ETFs that it had purchased last year. The Fed said it will outright sell them.
The Fed’s tersely worded statement said that the bond and ETF sales “will be gradual and orderly, and will aim to minimize the potential for any adverse impact on market functioning by taking into account daily liquidity and trading conditions for exchange traded funds and corporate bonds.”
The facility, set up in a Special Purpose Vehicle (SPV) that the Fed calls Secondary Market Corporate Credit Facility (SMCCF), was iconic not because of its size, which was endlessly hyped in the media at the time as a $750-billion bond-buying giant though it never got close; but because of its previously forbidden nature.
It was the first time that the Fed had purchased corporate bonds, having thus stepped over another of many red lines. This deal was part of the CARES Act with equity funding provided by the US Treasury. The equity funding was designed to shuffle the first loss to the taxpayer.
The Fed acquired these corporate bonds, junk bonds, corporate bond ETFs, and junk bond ETFs in the spring and summer last year. It stopped buying ETFs in July last year. And bond purchases slowed to a trickle after that. The entire facility was put on ice on December 31, after the Mnuchin Treasury refused to extend it, and the Fed has not bought any bonds since then.
Now the Fed said it will sell its holdings outright. Some of the bond will mature, and the Fed will get its money back without having to sell those. The sales will be handled by the trading desk at the New York Fed, which “will announce additional details soon and before sales begin.”
In its most recent statement of its detailed corporate bond holdings, dated May 10, the Fed listed $13.8 billion in corporate bonds and bond ETFs, of which:
- $5.2 billion were corporate bonds
- $8.6 billion were bond ETFs, including junk bond ETFs.
This SPV has always been small fry on the Fed’s $7.9 trillion balance sheet. What counted the most in the first few months of its existence was all the hype around it, which caused junk bond yields to drop to record lows – now that the Fed would be buying junk bonds. And bond ETF prices surged, now that the Fed would be buying junk-bond ETFs. The fact that the Fed never really did much buying got lost in the shuffle. It was just so much more fun to spread the hype.
As small as this facility may be – $13.8 billion being small only by the Fed’s standards of money-printing and bailing out – unwinding these holdings is nevertheless another baby step toward removing support from the market.
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Purely symbolic from a monetary standpoint. Pretty significant though, as far as symbols go.
“Red line crossed” vs “baby step” back.
good point.
True, but in some ways, I always thought that unless the Fed started intervening on the eve/in the middle of large Corp bankruptcies (Hertz, etc.) things had not reached peak kleptocracy.
The fact that the Fed let large BKs go through even during C19 meant things weren’t as bad as they might have been (gvt bailout wise).
Granted, the further gutting of rates by the Fed indirectly kept some hopeless companies on life support but at least the Fed didn’t go all in for outright resurrection.
I don’t think the fed cares about individual entities.
They care a lot about Goldman Sachs.
And they care about the member banks!
“It was just so much more fun to spread the hype.”
“Baby steps forward & baby steps back.”
“keeping hopeless companies on life support.”
“Thank goodness they didn’t go all the way & resurrect.”
What was it & what was it in aid of ??
A decoy / distraction ??
A, seen to be doing when not doing at all ??
A waste of time & effort & therefore effort spent for nothing ??
Was the Fed bored ??
It’s a trial balloon. They really need to see how much they own the secondary market before they unload the heavy cargo. (Gross would probably say they own it all) How are things in Belgium? If US consumers are buying imports then foreign reserves are key. What would make Americans slow down the buying? New Covid variants in the work place, theirs not ours? You have to be impressed with the way we threw the third world under the pandemic bus. Now China is getting a second wave from India. Problem these are the workers who are making our stuff? The US handling of worker safety was a 19th century scandal, but this global thing takes the marie antoinette cake.
I presume that they are trying to reduce prices by putting a downward pressure on the prices of those assets. Even major banks are now warning of “transitory” hyperinflation.
I love that incredibly ambiguous word. Strictly speaking, the Great Depression was transitory, since it only lasted a few years.
Symbolic
You beat me to it lol
This is only meaningful if Weimar Powell have the balls to stick to his guns and not reverse course the moment the market whine and start to drop once they find out about the tapering..
Totally reminds me of that nerd that pretends to be tough behind the bully’s back but the moment the bully turns around…no so tough anymore.
Exactly. The FED’s an empty suit.
yup. easy money precedent set.
convenient emergency in 3…2…1… alien invasion! quick, buy corporate bonds! (or whatever).
They would be War Bonds. War of the Worlds Bonds!
If the FED makes money on the sale of these securities, who gets the windfall and will they pay capital gains tax on it?
We Little People will be enlightened by our corporate conglomerate media that Fed SPV’s “paid for themselves” just as we were told the 2008 bailouts of corporate criminals did.
And the Iraqi Oil would pay for the war….
Remember that GWB lie?
We’re also told that the immigration of low skill, low income people “pays for itself.”
The elite on both sides peddle all sorts of lies.
Please, always put “elite” in quotes:
“Through this and other experiences I began to discern one of the elements of an education: get as near to the supposed masters and commanders as you can and see what stuff they are really made of. As I watched famous scholars and professors flounder here and there, I also, in my career as a speaker at the Oxford Union, had a chance to meet senior ministers and parliamentarians ‘up close’ and dine with them before as well as drink with them afterward, and be amazed once again at how ignorant and sometimes plain stupid were the people who claimed to run the country.” – Christopher Hitchens
A former managers last words to me following a lengthy discussion where I argued that employee respect must all be earned.
“You must respect the POSITION.”
Wolf, you do realize that the Fed reads your blog ?
Some are even commenting. Pretty sure the Trucker Guy is Neel Kashkari.
I rode my bicycle past Neel’s office today at lunchtime. He’s got a nice view of downtown Minneapolis and the Mississippi river, eh? But, since the wind was from the west, I rode around the lakes; and I prefer those views much more on a warm, sunny day.
The Fed should not interject itself into the corporate bond & junk bond ETF market. After their “gradual and orderly” sales, I would hope that they steer clear of buying individual corporate paper in the future.
We’re you downwind and if so did you detect sulfur
SoCal Jim is Janet Yellen.
Really ??
S%#t !!
Our Father who art in heaven
Hallowed be thyn-ed name
?
But, but, but, but, but .. it’s all in the interpretation.
So I took the liberty ..
What ..
Where you going to say something different ..
As Dave Ramsey says: Baby Steps.
13.8B is a baby step in the right direction.
Anybody here marching on congress to balance the budget? Thought not.
As long as congress spends more than they tax somebody will have to be buying the bonds. That somebody is more and more the fed. They have no choice once congress spends it. Both parties playing the game.
Anybody marching on Congress’s corporate or dynastic masters? Seems like back during “Occupy” they showed up at a few CEOs and other ultra rich string-pullers homes, but the cops flushed them all out quick.
Can’t have these law abiding citizens (and especially their innocent families) harassed in their very homes, can we?
Probably were all at vacation homes, anyway……
And forget corporate HQ, if you can even figure out where it really is.
Globalists need to significantly crash the Markets so the Great Reset can move forward according to plan. They are beginning to fall behind several milestones and need to accelerate the crash to meet Davos Overlords schedule.
Don’t forget the Illuminati
Don’t worry mate, the great reset is coming. We just need to wait for GME to squeeze.
The total US corporate bond market is what, around $10.6 trillion?
There’s a sucker born every minute .. hey !!
Minutes of Fed Private Meeting:
Q: Do you think they notice that interest rates are zero and inflation is 4%?
A: Not yet.
Q: How much longer can we keep this game up?
A: Keep talking about unemploymet.
Q: But there are a record number of job openings.
A: SO?
Let’s sell off some of this corporate debt, you know, the stuff we were never supposed to deal in in the first place. It will look like we are doing something.
Q: Is the BLS tweaking the PCE and the CPI?
A: The best they can.
Q: Still no blowback on us promoting inflation and that “stable prices” thing?
A: Nope.
Historicus,
You deserve a capital H and I cannot stop laughing. Keep going!
JWB
Cracked me up now kindly find a fix for this pox.
A Playwright !!
Salutations maestro ..
Waiting for Godot
“The equity funding was designed to shuffle the first loss to the taxpayer.”
Well, knock me over with a feather.
It seems like I can recall reading one time that when the Fed was originally set up, it was supposed to buy only corporate debt to respond to liquidity shortages in each of the Fed bank districts. Then when WW-I arrived a few years later, Congress required the Fed to buy Federal debt issued to finance the war effort. Once Congress discovered this magic money tree, they made the law permanent and now people are aghast at the idea of the Fed buying corporate debt.
a recycling vacuum cleaner
Here’s another example of “there’s nothing more permanent than a temporary government program” and something that, like the Fed Res Act, enabled a FAR bigger and more intrusive fedgov than the founders intended – income tax WITHOLDING was enacted during WWII as a temporary measure because too many people weren’t filing income tax returns.
Imagine stock markets go down 5% tomorrow.
How long before Powell goes on tv and says sorry we were kidding, we arent even thinking about thinking about unwinding the junk.
Look Squirrel.
I am very skeptical of this move. If stocks enter a small downturn, correction or bear market, everything will be back and even more. Don’t forget to buy the dip this time. Stonks will go up always. BTFD!
The Fed can not step away from the “market”. Congress has to play it to the bone. The “step away” ship departed a long time ago. The Fed knows the tune. When the shit storm starts the worthless Congress will blame the Fed and do nothing unless their poltical asses get in a crack because of Joe blow feelin’ da pain. Maybe the Fed can keep people believing that all is good. If the stemmie checks don’t start back up the Blues are going to lose in 22.
I have not heard a single politician even breathe a word about the FED’s war against the poor.
“There’s a floor under the stock market.”
~Nancy Pelosi
Born 26 March 1940 she is 81.??
It’s amazing how government medical insurance can keep people alive long after they lose their minds.
M
But is she actually alive? I’m thinking Breznev here.
If the infrastructure bill passes and is adopted with anything like 2 trillion of spending……
The fed will have a grand opportunity to normalize the world.
Europe is approaching a time when its demographics are starting to become less difficult to manage
The US is about to begin another upward climb that may not be as grand as the baby boom but will provide positive growth most years.
Other nations will be contributing aside from Japan.
So…..by early next year the fed must apply the brakes.
The braking will be extremely tricky to manage since tax increases may be evident, tariff adjustments may be discussed and Covid exists. Not to mention the 2025 automatic tax increases and demands for more spending. Unfortunately, I have little faith in Jay P to manage this enormous challenge without serious mistakes. I think this man is more political than economic so I expect actions and rhetoric which are deceiving. As my mom always said…..if you want to know what someone is thinking don’t listen to their words….watch their actions.
The administration will be screaming like stuck pigs about a fed that is purposely destroying their 4 year record.
It will be like coming out of a national nightmare and waking up in 1984.
Then…..just as we approach comfortable……the collision between the the deficits caused by excessive spending and our future priorities will occur.
It will be an interesting time to be alive…….and somewhat scary…….but which era of US history was not scary. It is how it works.
Gold will still be a hold, markets will be….hard to watch…..and a lot of young people will learn lessons about risk that they will carry with them for the rest of their lives.
So… will interest rates start to rise?
rax
Short answer NO.
Off course this comes with qualifications,
To raise interest rates, you have to have two conditions,
– a fiscally responsible government (which you don’t)!
– fully informed populace, which you umm don’t unfortunately)!
So, this train wreck will continue, don’t mind Mr. Wolf’s excitement about “baby steps “!!
The swamp is still fully functioning micro environment ( Mr swamp creature can attest to this)!
that blight need to be ( surgically removed) from the body of American state politics.
I haven’t heard any American representative be it federal or on state level fronting the American public with the respect they deserve by telling the truth that they deserve to know, after all they’re going to be the once paying for all these mistakes sooner or later.
Yes. You’ll need a fresh start, with DECENT human beings to lead you. And they ( believe it or not) exist.
Talking about 13 billion dollars of retreat from a massive payload of FAKE MONEY, is hardly going to make headlines, and if it does it will be a smoke screen and a distraction that shall mask nothing under it.
I suspect the fed will take their hands off long rates in the fall and the market will slowly start a second leg up toward 3 to 4 percent……hand in hand with some announcement from Europe and other foreign nations. The shorter rates the fed controls directly might not move for another year to year and a half. If evidence emerges that inflation is becoming imbedded the moves will be quicker but if inflation starts to settle down (as they expect) the increases will be paced at a slow rate. The more the congress spends the higher the rates. The governing issue for the fed will be the dollar. If it weakens in spite of higher rates they will be encouraged…..if it strengthens…..the pace will be difficult to sustain.
“announcement from Europe and other foreign nations”
Here’s one that might be important:
“Russia to eliminate US dollar from sovereign wealth fund THIS MONTH amid warning of politics sabotaging currency”
“Gradually, the dollar is becoming toxic.”
They are dumping USD 40 Billion of assets. The article on RT website doesn’t say what form these assets are in. Might be interesting to know. The Russians also say they are ready in case they are disconnected from the SWIFT network.
TT
RT is better for ‘western’ news than any other source.
They’ve got some great characters on all their TV programs, I’ve watched it for 10yrs since it came to UK
First saw Wolf on the Max&Stacey Keiser show.
In the States you might get ‘run in’ by the CIA if you watch it.
They do a great’ Foreign Agent’ tee shirt.
The purchases were mainly jawboning, so these sales are, what? A signal that the Fed is sincerely thinking about thinking about when to reduce accommodation, maybe with intent to increase credibility that they are awake without scaring the horses, much?
It will take them years to think about even thinking about doing anything significant to unwind what they have already done and by then there will be a new crisis that requires more accommodation. I bet you!
Is unwind the right word here .. don’t they all (across the board players in the fields) just look in another direction & move on ??
Oh, & pretend .. good times .. past, present & future .. for all they are worth as the media fiddles to the lyrics.
selling 13 Billion by years end…
as they buy 120 Billion of paper each month?
This is for show. This is exiting an embarrassment that is them dealing in corporate paper when they had no business doing in the first place.
The S&P is looking a bit tired nowadays. This will provide a boost for sure!!!
They might have driven the boat to close to the waterfall. First step in trying to make the turn.
Thanks for the coverage, I wouldn’t have heard about it otherwise. I agree with the others, the intervention was always more talk than action. It was a symbolic rubicon crossed viz moral hazard, but maybe we can forget about that now and not do it again in the future. Or not. Oh well.
The unwind (announced in a holiday-shortened first week of summer) and the glacial unwind pace announced are both calculated to not cause even a ripple in the markets, and it won’t.
As far as removing support from the market, it’s really just pulling out a toothpick that everyone had almost forgotten about.
In military thinking and maneuvers, I believe this move of buying back 13.8b is just a “shot across the bow” to see how the markets react.
It’s a cheap way to gauge any future actions the Fed may take.
Of course this is just my opinion.
Lance Roberts also indicated the Fed would start withdrawing it’s support of the markets, and along with the drying up stimulus, with a correction of 7-10%, or possibly more, mid-summer.
I think we are seeing a top for now unless the 2T infrastructure is passed, then it would back to all time highs, – that’s if it’s passed late summer.
**Sorry I meant “selling back 13.8b”
I am sure these are small amounts compared to the Fed’s balance sheet… but how large are they compared to Corporate Bond and ETF markets?
OK… looks like I found it on my own.
Corporate Bond Market (U.S. only): $8 plus trillion
ETF Assets Under Management (U.S. only): $5 plus trillion
It is hard to see how the amounts the Fed has will move either of these markets at all. Which then leads to the question of “why did the Fed buy them?”
SpencerG,
As I said in the article, the important part was the hype. I said this in my reporting on it since last summer. The media trotted out “$750 billion.” The hype lasted months. From the day the facility was rumored to be announced, junk bond ETFs and junk bond prices soared. These were huge moves, in just days.
The whole thing was a superbly executed hype operation. The Fed has admitted as much. Now the hype is over.
Oct 8: “Touting the Success of Jawboning, Fed Steps Away from Corporate Bond Market, Having Bought Almost No Bonds & Bond ETFs”
https://wolfstreet.com/2020/10/08/patting-itself-on-the-back-fed-steps-away-from-corporate-bond-market-having-bought-almost-no-bonds/
Sep 9: https://wolfstreet.com/2020/09/09/fed-bought-zero-bond-etfs-none-zilch-in-august-etf-holdings-actually-fell-bought-almost-no-corporate-bonds/
Jun 28: https://wolfstreet.com/2020/06/28/fed-discloses-it-bought-tiny-amounts-of-corporate-bonds-including-a-whopping-15-5-million-with-an-m-in-junk-bonds/
The “hype”/psychology/sentiment is the important thing. It’s kind of crazy to admit that, but it has to be true.
Hussman has discussed at some length.
Also, Hussman and others have said that all the “facilities” are illegal, and there was a petition going around the economics/banking profession to sign to that. I am not a lawyer, but I believe the facilities were created precisely to get around the laws defining Fed functioning. (which is illegal- you can’t just create a loophole on paper- if somebody wants to sue and you have an ethical judge).
Anyway, it’s all unfortunate that bankers think they can turn knobs and control the peasants because they are our “betters”.
The income, wealth and other “inequalities” are the results, and that’s just the short list.
There is no free lunch.
To SpencerG: I believe the size of a very small pimple on the behind of a
T Rex.
Yeah… I just posted that. Along with the question o what was the point in buying such a small amount? To test the process perhaps???
Thanks!
The facility was set to buy much more but it wasn’t necessary. After a few days of no new issuance March-ish 2020, the junk bond market went back to better than normal. So they stopped.
SpencerG,
See my comment above.
Yes… I have seen your thoughts on their “hype campaign” before. I largely agree with you… they have to be pleased with how it turned out.
But people at the highest levels of government and business generally don’t try to pick sides in the guesswork of what the future holds… they try to position themselves for success no matter which way the future heads.
That is why I was throwing out the idea that the Fed wanted to “test the process”… maybe there is another reason that I am not thinking of. But it would have provided a hedge if their hype campaign had failed.
In 1985 Paul Volcker tried but failed to constrict bank financing of LBOs. The WSJ reported:
“The Reagan administration and the Securities and Exchange Commission strongly objected to the Federal Reserve Board’s plan to restrict the use of ‘junk bonds’ in financing corporate takeovers. The Justice Department … and the Council of Economic Advisers, said the Fed proposal to extend its credit controls to debt issued in connection with corporate takeovers would ‘distort the market for corporate control.’ ”
The WSJ story noted that:
“a dozen U.S. senators signed a letter supporting the Fed’s interpretation. The senators, including Budget Committee Chairman Pete Domenici (R., N.M.) and William Proxmire (D., Wis.), the senior Democrat on the Banking Committee, said they were concerned that highly leveraged corporate takeovers are weakening corporations. ‘By substituting debt for equity on the balance sheets of the nation’s corporations, junk bond financing drains financial resources from productive uses such as economic development and job creation,’ the [senators’] letter said.”
In 1985 Fed chairman Volcker tried to kill junk bonds.
In 2020 Fed chairman Powell bought junk bonds.
(See “U.S. Agencies, SEC Object to Fed Plan To Curb Junk Bonds Used in Takeovers,” WSJ, Dec. 24, 1985)
Can these things be rehypothecated ? If so, I’m sure they’ll find a buyer then.
The ECB owns and buys loads of corporate bonds, some acquired at negative yields! People should be on the streets protesting this, but they don’t. The MSM hardly mention it.
But think about it: A small business who needs a loan needs to go to a bank and get charged a high interest rate, because it needs to pay for bank profits and CEO bonuses. A big corporation, who already had an unfair advantage because of political influence and scale, can just issue their own bonds, which then get bought by the central bank at extremely low, sometimes negative, rates!
How is that for an unlevel playing field? Why are the media not all over this and shouting scandal!? This has been going on for half a decade now. MSM are useless.
Yes .. ?
“MSM are useless.”
Why would they complain about something that is exactly as you describe, something that benefits large corporations, like them, as well as their advertisers which are also large corporations? They also don’t want to offend the OWNED government which regulates them.
The MSM no longer acts as intended by the 1st Amendment as a 4th estate and watchdog on behalf of the bests interests of the people. They are part of what they are supposed to be watching.
So, who watches the watchmen? No one but themselves.
LOL, the Fed is now Bob Wiley.
“…BABY STEP ONTO THE ELEVATOR… BABY STEP INTO THE ELEVATOR… I’M *IN* THE ELEVATOR. [DOORS CLOSE] AHHHHHHHHHHHH!”
Good luck, Jerome. Hope you can handle it.
Richard Dreyfuss could surely handle it. He wasn’t just a good shrink for Bob Wiley. Was also a banana republic dictator in Mood Over Parador and later on handled the role of Bernie Madoff quite well. Dreyfuss for future Fed chair?
UPDATE: bond EFT sales to begin June 7
The New York Fed just announced that it will start selling the Fed’s holdings of corporate bond ETFs on June 7.
“Sales will be gradual and orderly,” it said, echoing the announcement yesterday.
And by orderly, they mean:
Remain calm. All is well.
Litmus test for the markets in 4 days… Could be interesting. Temper tantrum, nothing burger or chaos to come
Yeah but they are going to suck up all the bonds that will need to be issued to fund the new Infrastructure plan.
The original structure of the fed was to purchase short term corporate debt that would later expire thus removing temporary liquidity from the market based off the actions of JP Morgan during the panic of 1907. It wasn’t until FDR that the fed began purchasing US treasuries to support the war effort but the original design never returned and thus we now have an ever expanding money supply.
Marcus…
The Fed came into existence in 1913
And the Fed buying corporates would ADD liquidity, not remove it.
And the Fed was not directed to be involved in anything but federally backed securities.
Correct me if I’m wrong.
Gosh, I hope no billionaires get hurt by the FED action. Slim chance.
Better noy be any of that cr.p in my pension fund!
What do you mean, the Fed has a Trading Desk?!
Is it as in “we’re the Fed, doing Fed business?”