Unpacking The Fed's Corporate Bond-Buying Program
Fed releases new details on plan to purchase corporate bonds.
U.S. retail sales surge.
Cycle, valuation and sentiment outlook.
On the latest edition of Market Week in Review, Senior Quantitative Research Analyst Abraham Robison and Senior Client Investment Analyst Chris Kyle discussed the U.S. Federal Reserve's (the Fed) recent announcement on corporate bond purchases, the latest macroeconomic data and the outlook for investors.
Fed provides updates to bond-purchasing program
On June 15, the Fed detailed enhancements to its Secondary Market Corporate Credit Facility - the program it created in March - to purchase up to $250 billion in corporate bonds and bond ETFs (exchanged-traded funds). "In purchasing this debt, the Fed's aim is to build a broad-based, diversified portfolio of U.S. corporate bonds," Robison said. He added that the program had previously featured a clunky opt-in provision for companies. The Fed will now purchase all corporate bonds that are rated BBB or higher with five years or less to maturity, Robison explained.
"Essentially, these new details pave the way for the central bank to buy everything it wants to buy, in order to deliver on its whatever-it-takes promise to stabilize the U.S. economy," he said. Fixed-income markets were pleased by the Fed's announcement, Robison noted, with credit spreads tightening on the news.
The Fed's approach has led some to question the risks of the central bank buying just about everything, he noted. Robison said that while such an approach can lead to problems down the line - such as runaway inflation - the Fed's response to the 2008 financial crisis didn't lead to any significant inflation issues. While moral hazards could also become a problem later on, Robison emphasized that the Fed's focus right now is on the short-term-in other words, in helping the economy pull through the COVID-19 crisis.
"The Fed's actions today have been compared to the steps the Bank of Japan took in 2001, in the wake of a decade-long housing crisis. The Japanese central bank ended up expanding its balance sheet so much that now, nearly 20 years later, it holds assets amounting to roughly an entire year's worth of the country's GDP (gross domestic product)," he explained. While this has led to market-functioning problems in Japan, Robison said it's important to note that the Fed's current balance sheet only comprises about 30% of U.S. GDP.
Fed releases new details on plan to purchase corporate bonds.
U.S. retail sales surge.
Cycle, valuation and sentiment outlook.
On the latest edition of Market Week in Review, Senior Quantitative Research Analyst Abraham Robison and Senior Client Investment Analyst Chris Kyle discussed the U.S. Federal Reserve's (the Fed) recent announcement on corporate bond purchases, the latest macroeconomic data and the outlook for investors.
Fed provides updates to bond-purchasing program
On June 15, the Fed detailed enhancements to its Secondary Market Corporate Credit Facility - the program it created in March - to purchase up to $250 billion in corporate bonds and bond ETFs (exchanged-traded funds). "In purchasing this debt, the Fed's aim is to build a broad-based, diversified portfolio of U.S. corporate bonds," Robison said. He added that the program had previously featured a clunky opt-in provision for companies. The Fed will now purchase all corporate bonds that are rated BBB or higher with five years or less to maturity, Robison explained.
"Essentially, these new details pave the way for the central bank to buy everything it wants to buy, in order to deliver on its whatever-it-takes promise to stabilize the U.S. economy," he said. Fixed-income markets were pleased by the Fed's announcement, Robison noted, with credit spreads tightening on the news.
The Fed's approach has led some to question the risks of the central bank buying just about everything, he noted. Robison said that while such an approach can lead to problems down the line - such as runaway inflation - the Fed's response to the 2008 financial crisis didn't lead to any significant inflation issues. While moral hazards could also become a problem later on, Robison emphasized that the Fed's focus right now is on the short-term-in other words, in helping the economy pull through the COVID-19 crisis.
"The Fed's actions today have been compared to the steps the Bank of Japan took in 2001, in the wake of a decade-long housing crisis. The Japanese central bank ended up expanding its balance sheet so much that now, nearly 20 years later, it holds assets amounting to roughly an entire year's worth of the country's GDP (gross domestic product)," he explained. While this has led to market-functioning problems in Japan, Robison said it's important to note that the Fed's current balance sheet only comprises about 30% of U.S. GDP.
