The Federal Reserve released data on its earliest purchases of corporate bonds, giving the market its first glimpse into the scope of the central bank's new assets.
The central bank bought $428.9 million in corporate debt over the first two days of its new bond-buying efforts, according to a June 28 data release on trades at the Fed's Secondary Market Corporate Credit Facility, or SMCCF. The Fed released the data as part of its monthly reports to Congress on its emergency lending programs.
The Fed has been purchasing exchange-traded funds tied to the corporate bond market through the SMCCF since May 12, but it began buying specific bonds on June 16. The Fed's ETF purchases dwarf its new bond holdings, with $5.29 billion of bond ETFs purchased from May 19 to June 17, but Fed Chairman Jerome Powell has said the Fed intends to gradually move away from ETFs and toward individual bonds.
The Fed's purchasing of individual corporate bonds on the secondary market could help support new issuance, and it does have an ability to expand SMCCF activity. In a June 29 report, Oxford Economics Chief U.S. Financial Economist Kathy Bostjancic noted that the disclosed purchases are far below the total potential of $250 billion the Fed could buy in the secondary market.
So far, the bond purchases span most sectors of the U.S. economy, with the exception of the banking sector, which was excluded from the facility. The Fed was most active in the tech, insurance, consumer, energy and utilities sectors. It executed three purchases each of AT&T Inc., Anthem Inc. and UnitedHealth Group Inc.'s debt, and bought bonds issued by Comcast Corp., Microsoft Corp., International Business Machines Corp. and Walmart Inc., among other companies, twice each.
By purchase amount, AT&T and UnitedHealth were the central bank's largest positions, at $16.5 million each. All told, the Fed bought 86 companies' debt.
The Fed's bond purchases so far have been limited to companies that compose a broad market index it created to guide its bond buying activity. The index includes 794 companies with investment-grade debt as of March 22, allowing some "fallen angels" — companies that previously had high-rated debt but since fell into high-yield or "junk" status — to be included. The Fed's index is intended to generally represent the overall diversified universe of secondary market bonds with investment grade ratings as of March 22, Bostjancic said in the report.
In terms of its bond holdings' credit ratings, the Fed appears to have deviated slightly from the index's composition, according to the data release. The bond portfolio as of June 16 had 48.07% in AAA, AA or A-rated notes, higher than the 42.43% allocated toward that rating range under the index. Bonds rated BBB, still an investment grade but riskier than the A class, represented 48.31% of the portfolio compared with 54.77% of the index. And high-yield bonds, those rated BB, made up 3.62% of the portfolio but only 2.8% of the index.
With the secondary market facility up and running, the Fed is also turning its attention to buying bonds directly from issuers. This program, the Primary Market Corporate Credit Facility, or PMCCF, launched June 29. But the prospects for usage of this facility are dim, analysts believe. The PMCCF entails a 100-basis-point fee, and issuers must be certified by the Fed before their bonds are eligible for purchase.
"We have long suggested that the certification process, both due to the administrative burden and the potential for stigma, are likely to render takeup extremely light" in the primary facility, BMO Capital Markets Director Daniel Krieter wrote on June 30. The surcharge on top of market rates could also contribute to the facility going "largely unused," he added.
Energy and utility bonds
Through June 16, Fed purchased bonds with a par value of $37 million on the secondary market in the energy and utilities sectors. This includes $17.5 million in energy bonds and $19.5 million in utilities bonds.
In the oil and gas sector, the Fed has so far bought bonds issued by integrated supermajors like Exxon Mobil Corp. and Chevron Corp., as well as independent producer Diamondback Energy Inc. and pipeline company Energy Transfer LP. The list of companies eligible for the program includes all parts of the industry, including refining and oilfield services.
Among large-cap utilities, the Fed bought bonds from subsidiaries of Duke Energy Corp., NextEra Energy Inc., Dominion Energy Inc., FirstEnergy Corp., Southern Co., Exelon Corp., DTE Energy Co., Eversource Energy and Edison International.