By mid-September, the junk bond market started heading south.
By Wolf Richter for WOLF STREET.
It has been a sordid market manipulation and bondholder- and particularly junk-bondholder bailout scheme all along. Today was the final chapter.
Remember the massive corporate bond-buying spree that the Fed announced in March 2020 and that the media hyped all over the place with gurus of all kinds claiming that the Fed would buy $750 billion in corporate bonds, junk bonds, bond ETFs, and junk-bond ETFs? It triggered a huge rally in corporate bonds and junk bonds and drove junk-bond yields to the lowest levels ever. And the Fed never actually bought a lot.
So today, the Federal Reserve Bank of New York, which handles the securities trades of the Federal Reserve asset purchase program, announced – after selling the small amounts of corporate bonds, bond ETFs, and junk-bond ETFs it had actually bought – that it had earned $513 million in interest and capital gains on those deals, and that it sent 90% of those earnings to the US Treasury today. And it’s washing its hands off the corporate bond market.
Since the Fed was effectively barred from buying corporate bonds, it set up a separate legal entity, an LLC it named “Corporate Credit Facilities” (or CCF). It lent money to this Special Purpose Vehicle while the US Treasury provided equity capital to the SPV. The SPV then bought the corporate bonds and ETFs. BlackRock was involved and then State Street, and a whole bunch of bond funds from which it bought the bonds, and everyone and their dog began front-running the Fed, and a huge rally in corporate bonds, junk bonds, and bond ETFs ensued because, you know, the Fed would be buying $750 billion of this stuff.
Well, OK, the Fed stopped buying bond ETFs in July 2020, and its purchases of corporate bonds were minuscule. At the peak, the SPV held only about $5.2 billion in ETFs and $8.6 billion in corporate bonds, $13.8 billion in total, of an $8.5 trillion-with-a-T pile of total assets on the Fed’s balance sheet.
The whole scheme was put on ice at the end of December, when the Mnuchin Treasury refused to extend the program.
On June 2, the Fed announced that it would sell bonds and bond ETFs outright, and then sold them into the hottest bond market ever, and the SPV received market value for these bonds. Other bonds matured and were redeemed, and the SPV received face value for those bonds. By the end of August, the Fed’s SPV had sold the last corporate bonds and bond ETFs.
In mid-September, the junk bond market peaked, with yields at the lowest levels ever, with the average BB-rated junk-bond yield falling to 3.01%, when inflation was already over 5%. But then prices U-turned and started heading south, and yields started rising. Currently, the average BB-rated yield is at 3.44%.
The CCF is the yellow section in the chart of the whole alphabet soup of bailout SPVs that the Fed set up in the spring of 2020. The Fed discloses this data on its balance sheet. By mid-September, the SPV paid back the loan it had received from the Fed, and it paid back the equity capital it had received from the Treasury, and the balance went to near-zero:
So today, the Federal Reserve Bank of New York said that this infamous CCF earned $513 million in interest and capital gains over its life from March 2020 to September 2021, and that it sent 90% of that profit, so $462 million, to the US Treasury today, and that it retained 10% of that profit, so $51 million, to cover costs, as spelled out in the CCF’s LLC agreement.
It said that the SPV is now being dissolved.
The SPV’s purpose was to bail out holders of corporate bonds, and particularly of junk bonds, which had gotten crushed during the March 2020 sell-off. By jawboning the markets and creating all this hoopla, the Fed didn’t actually need to buy $750 billion in corporate bonds.
Its words were enough to manipulate markets higher and cause fantastic gains for speculators in junk bonds. The junk bond rally triggered by the Fed’s announcement that it would buy junk bonds via junk-bond ETFs had a huge impact on the market, though the Fed ended up buying very little in the end.
The Fed enriched these speculators, while at the same time, it crushed the savers, first through its interest rate repression, and then since early this year, with the worst inflation in three decades. It was a massive wealth transfer, from savers to bond holders, accomplished in two slick steps. But OK. The savers, who’d refused to speculate, had it coming. To heck with them – that’s the official policy of the Fed.
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