The Federal Reserve will be starting its long-awaited corporate bond program Tuesday amid a boom in debt issuance.
The central bank will kick off its Secondary Market Corporate Credit Facility, which is part of a history-making initiative in which it will purchase exchange-traded funds that track the corporate debt market. Asset management giant BlackRock will be running the operation under the New York Fed's supervision.
In particular, the facility will buy up ETFs that hold so-called fallen angel bonds of companies that formerly had been classified as investment grade but have been downgraded to speculative or junk, particularly in cases where those downgrades happened due to the coronavirus crisis.
Its companion program, the Primary Market Corporate Credit Facility, in which the Fed will be buying the actual bonds as well as syndicated loans, is scheduled to start soon.
After slumping earlier in the year and particularly as the coronavirus became more widespread, the corporate debt market has exploded. Issuance through April of $834.3 billion was up 69% year to date over the same period a year ago, and March and April saw record amounts brought to market. Some $25.7 billion hit the market on Monday alone.
The program was announced in early April, but the Fed held off on kicking it off to work out the details.
One key component of the ETF purchases is that the Fed will not buy bonds that are trading at more than one standard deviation above their net asset value within a one-year time frame. Bond ETFs are not always priced as accurately as their equity counterparts.
There will be other considerations as well, according to an announcement Monday from the New York Fed that did not specify which ETFs the central bank will be purchasing. They include the composition of both the investment grade and speculative debt, management style, the amount held in depository institutions, the length of time for which the syndicated loans are due, average daily trading volume and leverage.