The encyclopedia · Finance & Accounting · Financial decision · 2020
The Fed bought corporate bonds and ETFs to backstop a frozen credit market.
In 2020 the Fed created the SMCCF to buy corporate bonds and broad ETFs, cushioning large employers without lending to any single firm.
Federal Reserve Bank of New York
the move
When COVID hit in March 2020, investors rushed out of corporate bonds and the spread market seized up, threatening the financing of large employers. The Fed had already restarted emergency lending, but credit markets remained frozen.
On 23 March 2020 it created the SMCCF under Section 13(3), with the Treasury buying equity in the facility using CARES Act funds. Instead of direct loans, the facility bought investment-grade corporate bonds and broad U.S. corporate-bond ETFs in the secondary market, so it stabilized prices rather than choosing borrowers.
The facility bought ETFs first in May 2020 and individual bonds from mid-June, helping to reopen the market. Because its portfolio tracked a broad index, it avoided picking winners and could be wound down as markets recovered.
why it works
- Panic in the secondary market was starving large employers of financing
- Buying an index-linked portfolio helps every issuer, not just one
- Using Treasury equity as first-loss cover let the Fed avoid taxpayer risk
- A secondary-market backstop works faster than screening individual loans
what transfers
A market-wide backstop can rescue many firms at once without picking winners, and an index-tracking purchase avoids the charge of choosing which company to save.
what came after
Purchases began with ETFs on 12 May 2020 and with corporate bonds on 16 June 2020. The facility stopped buying eligible assets on 31 December 2020 and its portfolio was wound down as markets normalized, with the program retired without the credit losses many had feared.
references
- The Fed - Secondary Market Corporate Credit Facility
- New York Fed Announces Start of Certain Secondary Market Corporate Credit Facility Purchases on May 12
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