The Fed is starting to turn the page on the Covid crisis. The US central bank has just announced that it will sell some $ 14 billion in assets from its Secondary Market Corporate Credit Facility (SMCCF). That is to say, corporate bonds purchased directly or indirectly as part of the program announced in March 2020, when the pandemic raised fears of a freeze on the “corporate” bond market in the United States.
Unlike in Europe, it is the markets and not the banks which constitute the main source of financing for companies on the other side of the Atlantic. “The SMCCF has proved vital to restore the functioning of the market last year, maintain the availability of credit for large employers, and support employment during the pandemic,” welcomed the Fed in its press release.
This program, put in place as a matter of urgency, had caused a stir. The Federal Reserve had never bought corporate bonds on the market. Even more surprisingly, it had extended its purchases to the debt of poorly rated companies (high yield). However, by opting for ETFs, listed index funds.
According to Bloomberg, the Fed’s balance sheet thus included Amazon bonds or VanEck’s ETF following the fallen angels (companies whose credit rating has shifted to the high yield category). Some then criticized the fact that the central bank was seeking to support large groups. And put on a drip, companies that should have filed for bankruptcy anyway.
Since March 2020, the bond market has returned to normal. The spread – the risk premium demanded by investors to lend a company rather than a state – is at its lowest level in 14 years on Wall Street. And the average yield on high yield bonds hit a historic low at 3.88% at the start of May.
The Fed had already stopped SMCCF purchases. The takeover now allows it to begin to shed the securities acquired. Carefully. “Sales will be gradual and orderly, and will aim to minimize any negative impact on the market,” the central bank warned. Initially, only ETFs will be concerned, then, from this summer, bonds. The objective is to have completed the disposals at the end of December.
The gesture is symbolic. Unlike the European Central Bank, which has integrated corporate bonds almost since the start of its asset purchase program (APP), the latter were never intended to become a permanent target for the Fed.
In addition, the securities that will be sold are a drop in the ocean of nearly $ 8 trillion in assets on its balance sheet. The fact remains that the end of this emergency measure sends a signal of normalization to the markets, at the very moment when the latter are wondering about the end of its main purchasing program (QE).
The central bank was also keen to point out that it was continuing its ultra-accommodative monetary policy. It is maintaining its monthly purchases (QE) of $ 120 billion of government bonds and mortgages, despite skyrocketing inflation.