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The Fed says it is going to start buying individual corporate bonds

CNBC logo CNBC 6/15/2020 Jeff Cox

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The Federal Reserve is expanding its foray into corporate credit to buy individual corporate bonds, on top of the exchange-traded funds it already is buying, the central bank announced Monday.

As part of a continuing effort to support market functioning and ease credit conditions, the Fed added functions to its Secondary Market Corporate Credit Facility.

The program has the ability to buy up to $750 billion worth of corporate credit. Its March 23 initial announcement is largely considered a watershed announcement for the financial markets, reeling from the coronavirus threat spread.

Under the latest guidelines, the Fed said it will buy, on the secondary market, individual bonds that have remaining maturities of five years or less. Those purchases will go along with the ETFs the Fed already has been buying, which are balanced towards investment-grade indexes but also include some junk bond funds that track debt which had been investment grade prior to the crisis but had been downgraded after.

The intent of the individual debt purchases will be "to create a corporate bond portfolio that is based on a broad, diversified market index of U.S. corporate bonds," the Fed said in a news release. 

"This index is made up of all the bonds in the secondary market that have been issued by U.S. companies that satisfy the facility's minimum rating, maximum maturity, and other criteria. This indexing approach will complement the facility's current purchases of exchange-traded funds," the statement said.

Issuers must have been rated BBB- or /Baa3, depending on the agency, as of March 22, just before the Fed announced its credit facilities. 

The Fed has yet to launch its Primary Market Corporate Credit Facility. As the name implies, that program will entail purchases in the primary market, or the direct issuers, with the Fed being the sole investor. In addition, the primary facility will target syndicated loans and bonds at issuance.

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