That promise had a profound impact — even though the US central bank has not yet directed the purchase of a single corporate bond.
“Central banks are sometimes as effective in their words as they are with actual action,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.
Launching in early May
Action is coming soon, though. The New York Fed, which is quarterbacking the Fed’s bond-buying programs, announced Monday that the Secondary Market Corporate Credit Facilities (SMCCF) is expected to begin buying corporate bond ETFs in early May. Corporate bond purchases will come “soon thereafter.” And a separate Fed facility, the Primary Market Corporate Credit Facility (PMCCF), is also expected to launch soon.
But the Fed has not actually begun to buy bonds yet, despite the dramatic impact on markets.
The goal of the programs, according to the Fed, is to make sure large employers have access to the credit they need to ride out this unprecedented storm.
To participate in the Fed program, businesses must have been created or organized in the United States or under US law and have a majority of their employees in the United States.
Fallen angels are welcome
The Fed originally said participants in the corporate bond-buying facility must have at least a BBB credit rating as of March 22. That’s the lowest rung of investment grade.
Not all junk-rated companies can participate. Firms must be rated at least BB- at the date of the purchase.
Critics argue the Fed is overstepping its mandate by purchasing corporate bonds — a step it never took during the 2008 financial crisis.
Gundlach said the Fed is using a “shell company set up to circumvent” the Federal Reserve Act, which created the US central bank.
Still, the Fed will be the one calling the shots. The Fed website said BlackRock will be “acting at the sole direction of the New York Fed on behalf of the facilities.”
“It’s terrible what they are doing. The Fed did a complete runaround the Federal Reserve Act,” said Boockvar, the Bleakley Advisory Group CIO.
Carnival, Boeing raise billions
No matter the legal debate, there is no question the corporate credit markets flung wide open after the Fed’s March 23 announcement.
Difficult to unwind
Beyond the legal questions, some fear the Fed’s emergency steps will set a dangerous precedent that could be hard to undo when the crisis is over.
“The problem with Fed involvement is it becomes a slippery slope,” said Boockvar. “They get more and more involved with more and more debt. Then you run into a recession and everyone is worried about the debt.”
Consider what happened with quantitative easing, the Fed’s 2008-era experiment with buying US Treasuries and mortgage securities. The purchases inflated the Fed’s balance sheet to $4.5 trillion by 2014, compared with just $900 billion in 2007.
“It’s just this perpetual cycle that we can’t seem to get off,” said Boockvar.