Is There a Disconnect Between Markets and the Economy?
The Federal Reserve continued to buy broad exposure to the corporate bond market with purchases of individual issues and exchange traded funds to fill out a self-constructed index for its Secondary Market Corporate Credit Facility, data for last month released Friday by the central bank showed.
No borrowers have taken advantage yet of its direct credit facility which opened at the end of June, according to the data, which are updated every 30 days.
The corporate credit program remains small, with just US$10.7 billion in purchases of bonds and exchange-traded funds by the Fed through the latest week. The Fed’s trade level disclosures for June released Friday show bond purchases from individual issuers totaling US$1.3 billion, including the debt of Apollo Management Holdings, Delta Air Lines Inc. and Apple Inc., a company that had US$94 billion in cash and short-term investments on its balance sheet in the March quarter.
The programs were announced in late March to stem financial market strains as the coronavirus spread and the economy weakened. The U.S. Treasury has pledged US$75 billion in taxpayer funds to absorb potential losses, which the Fed says can support up to US$750 billion in lending to keep corporate credit markets functioning. The mere announcement of the facilities served to tighten spreads and lower borrowing costs for firms.
The US$710 million increase in the size of the program over the past week was the smallest since the Fed began making purchases in that market in mid-May.
“As market functioning has improved, we have slowed the pace of purchases, from about US$300 million per day to a bit under US$200 million a day,” Daleep Singh, head of the markets group at the New York Fed, said Wednesday.
“If market conditions continue to improve, Fed purchases could slow further, potentially reaching very low levels or stopping entirely,” Singh said, while adding that “should conditions deteriorate, purchases would increase.”