The Federal Reserve has issued an update to its Secondary Market Corporate Credit Facility (SMCCF). The Fed indicated that it will begin making direct purchases of corporate bonds in an effort to support more liquidity and for additional credit for large employers. The Fed’s lending program has $250 billion for outstanding corporate bonds and another effort that can purchase up to $500 billion of newly issued debt.

According to the Fed’s revised term sheet and updated questions, the corporate bond purchases use an index approach to purchase corporate bonds in the secondary market from U.S. company issuers. The bonds must meet or exceed the facility’s minimum rating, as well as a maximum maturity and meet other criteria.

Also according to the Fed, its indexing approach complements the facility’s current purchases of exchange-traded funds (ETFs). The Fed’s purchases of U.S.-listed ETFs offered broad exposure to U.S. investment grade corporate bonds and exposure to U.S.-issued high-yield corporate bonds.

The Primary Market Corporate Credit Facility and Secondary Market Corporate Credit Facility were established with $75 billion in equity provided by the Treasury Department from the CARES Act. According to the New York Fed’s frequently asked questions, the $75 billion noted here generates a combined size of the facilities of up to $750 billion due to the Treasury’s equity being leveraged 10 to 1 when acquiring corporate bonds or syndicated loans from what are deemed to be “eligible issuers” that are rated as investment grade (BBB-/Baa3 or above) at the time the Fed makes the purchases.

This also plays into the Fed’s role of buying junk bonds. The junk bonds eligible for purchase include corporate bond issues from companies that carried “investment grade” rated as of March 22, 2020, and that remain rated at least BB-/Ba3 at the time of purchase.

While leverage is used here, the Treasury’s equity is 7-to-1 rather than 10-to-1 when the Fed is acquiring corporate bonds or syndicated loans rated below investment grade at the time of purchase.

To make matters even more complicated, the Fed’s limit on any single issuer is that they have a cap of 10% on purchases of any single issuer’s total debt/loan outstanding and that the total issue cap is 1.5% of the $750 billion.

There is a lot more that can be said about the matter, but the Fed’s action was credited for taking another big down day up into positive territory. As of 3:40 Eastern, the Dow was down only 30 points (0.12%) and the S&P 500 was up 10 points (0.3%).

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.