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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