The Federal Reserve Takes the Training Wheels Off
In a move that might be likened to dismantling scaffolding that’s no longer needed or removing the training wheels after a tyro cyclist has gotten steady riding on two wheels, the Federal Reserve said this week it would wind down its holdings of corporate bonds and exchange-traded funds.
The Fed launched its the Secondary Market Corporate Credit Facility (SMCCF) program, reportedly the first vehicle of its kind, in March of 2020 as part of what the Wall Street Journal called “a broader suite of programs established by the Fed and Treasury to shore up liquidity in financial markets.
“Stock and bond markets at the time were reeling from the fear and uncertainty regarding the coronavirus and economic lockdowns to contain it,” the WSJ reported.
The launch of the SMCFF was an effort “to unfreeze the flailing bond market as panic, inspired by the then-unfolding pandemic, threatened to keep American companies from renewing their debt or borrowing more,” according to the New York Times.
Although the Fed’s actual outlay was pocket change compared to its holdings of Treasury debt and agency mortgage-backed securities, the program provided what Janney chief income strategist Guy LeBlas called “a psychological booster for markets.”
That morale-boosting effect worked almost instantly, “restoring investor faith in the market and helping it to begin functioning again,” the NYT reported. Ultimately, the nation’s central bank used only a small percentage of the $250-billion capacity it had allocated to facilities for acquiring bonds and ETFs, and closed the facilities last December.
As of April 30, the Fed held $8.6 billion in corporate bond ETFs and $5.2 billion of individual corporate bonds, MarketWatch reported. That compares to $7.3 trillion of Treasuries and ABS currently on the Fed’s balance sheet.
The WSJ reported that the Fed is continuing to purchase Treasuries and ABS to the tune of at least $120 billion a month, with the intent of holding down long-term borrowing costs until the economy recovers further from the pandemic.
“SMCCF portfolio sales will be gradual and orderly, and will aim to minimize the potential for any adverse impact on market functioning by taking into account daily liquidity and trading conditions for exchange traded funds and corporate bonds,” the Fed said in a statement Wednesday. The sales are expected to be completed by the end of 2021, with net proceeds remitted to the Treasury Department.
