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Wells Fargo Credit Strategy | Credit Spotlight: Farewell Fed
Fed to Sell Corporate Bonds and ETFs Acquired During Covid-19 Crisis
The central bank under Jerome Powell made the purchases to shore up liquidity in debt markets after the pandemic hit in early 2020.www.wsj.com
Inizio della fine o fine dell'inizio?
Yesterday the Fed announced a first step in tapering, the intention to unwind its portfolio of corporate bonds and credit ETFs purchased under the Secondary Market Corporate Credit Facility (SMCCF). This facility, along with the never tapped Primary Market Corporate Credit Facility, marked the Fed’s first direct foray into the IG and HY markets. Ultimately, the Fed used only a fraction of purchase authorization under the SMCCF, which could have totaled as much as $250 billion, as holdings never eclipsed $15 billion. Instead, the injection of confidence in the market outweighed actual buying, which did not commence for a full six weeks after the facilities were announced. Now, with both IG and HY trading near new cyclical tights, the Fed is giving credit markets another vote of confidence by signaling its intention to exit. While more details are to come, the Fed plans to sell its portfolio in a “gradual and orderly” manner that aims “to minimize the potential for any adverse impact on market functioning.” Overall, we view this move as generally neutral for spreads and risk given steady demand for IG and the very small percent of the market owned by the Fed.
Key takeaways for credit investors:
1) The Fed currently holds $4.8 billion of IG bonds, or less than 1% of the $6.7 trillion market. Given the relatively small holdings, we do not expect the unwind of the bond portfolio to have a material impact on valuations. The Fed’s holdings consist of bonds maturing in 2025 or sooner, a segment of the market supported by strong demand (front-end retail inflows total $43.4 billion YTD).
2) HY bond ownership consists exclusively of COVID-related fallen angel downgrades and Ford (F) tops the list of holdings with $68.5 million currently held in the Fed’s portfolio. This represents more than half of the $121 million of fallen angel bonds on the Fed’s balance sheet from 15 issuers (F, WES, FE, ZFFNGR, SVC, ROCKIE, EPR, CLR, NMRK, FLR, RTLR, APA, KORS, HI, HXL). Total HY holdings in the SMCCF represent a mere 0.01% of overall HY market value.
3) The Fed ultimately purchased almost twice the amount of ETFs as bonds. Investors may see some volatility as the Fed unwinds its credit ETF positions, which total $8.6 billion. We highlight outsized holdings of LQD and JNK as posing the most acute risk of Fed-related volatility.
At a more macro level, investors may view this as the first step toward tighter monetary policy and tapering of asset purchases. If so, we could see a spike in rates volatility that weighs on the credit markets as risk appetite shifts. For investors concerned about the next steps for the Fed, if the May non-farm payrolls report on Friday (June 4) shows signs that the labor supply issues are easing, the Fed may have more reason to shift messaging at the FOMC meeting later this month. Overall, credit market technicals remain supported by cash on the sidelines and a global landscape of low yields, two factors which should keep a lid on spread volatility. However, a broader shift in the balance of fixed income supply and demand if the Fed exits the UST market is a key risk for credit investors.
secondo me Berlino farà dismettere a quelli che chiami "i parrucconi" i loro abiti fiammeggianti: tutti in jeans!
