EDITOR NOTE: Yesterday, the Federal Reserve just disclosed info on the corporate bonds it had purchased to help prop up a COVID-decimated economy. The names are listed below. Sure, the Fed’s purchases have inflated bond and stock prices, a way of “bailing out” asset holders. In fact, the disparity between those who hold assets and those who don’t have gotten wider. The Fed’s actions also inflate moral hazard, giving Wall Street and banks the impression that there will be no need to worry about market downturns, no need to practice any form of austerity, and no need to be overly concerned with risks, particularly when it comes to your money.
The Federal Reserve disclosed Sunday afternoon the amounts and the company names of the corporate bonds that it started buying for the first time ever in the week ended Friday, June 19. They’re not even rounding errors on the Fed’s balance sheet. The purchases of individual corporate bonds amounted to $428 million (with an M). By comparison, in the week ended April 1, when the Fed was doing a lot of heavy breathing, it bought $362 billion (with a B) of Treasury securities.
In addition, the Fed said in the disclosure that it held a total of $6.8 billion in bond ETFs as of June 19, up from $1.5 billion a month ago.
These bond ETFs and individual corporate bonds combined account for 1/10th of 1% of the Fed’s $7.1 trillion in total assets.
The Fed buys these corporate bonds and bond ETFs in its Special Purpose Vehicle that it calls Secondary Market Corporate Credit Facility (SMCCF). Like the Fed’s other alphabet-soup bailout SPVs, the SMCCF is an LLC entity.
The SPV is funded in two ways: One, with equity capital provided by the US Treasury Department, or rather by taxpayers, or rather by government borrowing, to cushion the Fed against losses; and two, by loans from the Fed at a leverage of 10 to 1. Then the SPV buys corporate bonds and bond ETFs in the open markets via the Fed’s primary dealers. The New York Fed handles all the details.
All these purchases and holdings were already reflected on the Fed’s prior weekly balance sheets in terms of the total amounts. Today’s disclosure just provides the company-specific details.
The Nitty Gritty.
The bonds that the Fed purchased were issued by 84 companies, in industries ranging from tobacco to video games, across the spectrum of US companies, and US subsidiaries of foreign companies (such as Toyota’s US finance subsidiary). The issuers include several of Warren Buffett’s companies, all kinds of energy companies, and some junk-rated companies, such as Ford.
But not a lot of junk on the list.
In terms of junk bonds, there isn’t much. Only 3.62% of its bond portfolio is now rated BB (BB+, BB, BB-), the top category of junk. This includes Ford (BB+). The Fed did not buy any bonds rated CCC or below. With 3.62% of the total corporate bond portfolio ($428 million) being junk bonds, the amount of junk bonds it holds come to $15.5 million.
The categories AAA, AA, and A account for 48.07% of the bonds. The category of BBB, the lowest investment-grade category, accounts for 48.31%.
The average maturity of the bonds is 3.3 years, ranging from 11 months (a Chevron bond that matures in May 2021) to five years (a Honeywell bond that matures in June 2025). Significantly, there are no long-dated maturities in this portfolio.
When these bonds mature, the company pays the Fed face value of the bonds, and the bond disappears off the Fed’s balance sheet. If the maturing bond is not replaced, the SPV can use the proceeds to pay down the loan the Fed issued.
By keeping maturities in the one-to-five-year range, the Fed appears to be setting the stage for letting the bonds roll off its balance sheet and be done with the program once the crisis is over.
AT&T is at the top of the list, with $16.5 million of bonds. The smallest position is Hyatt at $1.09 million – just symbolically dabbling here, really, since hotel bonds could get dicey.
There are also bonds from Southwest, but no bonds issued by American Airlines, Delta, or United, which would have spiced up the portfolio in a nerve-wracking manner for sure.
The table below shows the companies whose bonds the Fed purchased. If the Fed purchased several types of bonds from one company, or from a company’s subsidiary, I added them together. For example, the bonds of IBM Corp and IBM Credit are added together under “IBM.”
Corporate Bond ETFs.
At the end of May, the Fed disclosed that it had purchased $1.5 billion in corporate bond ETFs through May 18. Since then, the Fed has purchased more bond ETFs, and the market value as of June 18 of all its ETF holdings combined had increased to $6.8 billion.
This includes several junk-bond focused ETFs, but the amounts are small. For example, its holdings of the popular iShares iBoxx High Yield Corporate Bond ETF [HYG] are only $245.8 million:
The Fed will likely continue to buy some corporate bond ETFs and individual corporate bonds. But the bond market is currently red-hot. Spreads have tightened. And even American Airlines and Carnival Corp were able to issue new bonds though their revenues have collapsed. They need billions of dollars in new fuel to burn to get through this crisis, and they got the first pile of it from investors.
The Fed looks at this as a sign of success – that it essentially has done its job to keep credit flowing to these companies, and that it really doesn’t need to do much more. So now, it’s dabbling in these bond purchases, dabbling by Fed standards, where big moves are counted in hundreds of billions of dollars, not in millions or a few billion.
On the other side of the coin.
In reality, the Fed has been pushing up bond prices and stock prices to bail out asset holders so that they have absolutely no skin in the crisis, and this strategy has widened by a massive amount the already huge wealth disparity between asset holders and labor in the US – and the bigger the asset holders, the more they got from the Fed.
It also creates the notion that the Fed will always bailout asset holders, and that there is never a price to pay for any downturns, and that only people who work for a living have to pay that price.
Originally posted on Wolf Street