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Fed Balance Sheet Hits $7 Trillion: Increased Buying Of Corp Bond ETFs

Economic Inequality
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Fed’s buying of corporate debt ETFs increases by $1.50 billion

EDITOR NOTE: In sharp contrast to the start of 2018 when the Federal Reserve began aggressively reducing its balance sheet, bringing it to a low of $3.7 Trillion last year, the Fed has now expanded it to $7 Trillion in response to stem the economic damages caused by the coronavirus pandemic. This is roughly between 4 to 5 Trillion more than where we started and ended in the last financial crisis. And this last surge happened in just a matter of weeks. Ultimately, this is a bad sign for the purchasing power of your hard-earned dollars. Get ready for a massive dilution!

The numbers: The Federal Reserve’s balance sheet increased to $7.09 trillion for the week ending in May 20, up from $6.98 trillion in the previous week, the central bank said Thursday.

What happened: The Fed’s holdings in its corporate credit facility grew by $1.50 billion to $1.80 billion, after the central bank announced last Tuesday it would buy corporate bond exchange-traded funds.

The central bank’s support has driven up prices for these ETFs, especially for those focusing on investment-grade issuers.

The iShares iBoxx $ Investment Grade Corporate Bond ETF LQD-0.08%  is up 2.1% year-to-date, versus the 8.7% drop in the S&P 500 SPX-0.78%  over the same stretch.

Mortgage-bond purchases outpaced the Fed’s buying of U.S. government paper. Holdings of agency mortgage-backed securities rose by $79 billion to $1.86 trillion, while holdings of Treasurys increased by a more modest $32 billion to $4.09 trillion.

Overseas demand for dollars continued to linger. The Fed’s liquidity swaps, lending greenbacks to foreign central banks, grew by $5.17 billion to $446 billion.

Big picture: “Given the strength of both the primary and secondary corporate bond markets, it is not entirely clear how much the Fed really needs to buy through this facility, but surely investors are comforted to know that it is there as a backstop if needed,” said Thomas Simons, senior money market economist at Jefferies.

Market action: The yield on the 10-year Treasury note BX:TMUBMUSD10Y-2.41%   was virtually unchanged at around 0.68% on Sunday.

Originally posted on MarketWatch

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