and the US divisions of several foreign automakers are among the biggest direct beneficiaries of the Federal Reserve’s efforts to prop up the corporate debt market, according to Sunday’s revelations.
In total, the Fed on Sunday identified 794 companies whose bonds it will buy directly to support the investment grade corporate debt market. Besides Apple and Verizon, recipients include
and the American units of
Toyota engine Corp.
. Together, these six companies accounted for 10% of the debt purchased from a large list of Fed-backed borrowers.
The list includes debt from 12 different sectors. Two of them – cyclical consumer and non-cyclical consumer industries – account for more than a third of the corporate bonds the central bank planned to buy, according to the latest information released.
The Fed announced in March that it would buy corporate debt to prevent the market from freezing and depriving businesses of needed liquidity as the economy shuts down due to the coronavirus shock to the nation.
The central bank’s corporate debt program is structured in different phases. The Fed plans to buy up to $ 250 billion in debt already issued by companies. Later, he plans to buy up to $ 500 billion worth of newly issued bonds.
As part of its purchases of outstanding debt, the Fed began in mid-May to buy exchange-traded funds that hold both investment-grade bonds and investment-grade bonds. In another phase of those purchases, the Fed this month started buying real corporate bonds, not just ETFs. The central bank’s latest disclosures for the first time included the actual bonds it started buying this month.
In all, the central bank accumulated $ 8.7 billion in corporate debt until June 24. The program continues until September 30. Fed support has led to a boom in corporate debt issuance.
The Fed operates a market of $ 9.6 trillion corporate debt from companies that meet the criteria for the Fed’s lending program, including companies that were rated good on March 22 and whose maturities did not exceed five years.
The Fed will recalculate its list of potential purchases every four or five weeks to add companies that meet the eligibility requirements and to remove those that are no longer eligible.
The latest information revealed $ 398 million in securities purchased as of June 17, the first two days of individual bond purchases. These include bonds issued by a drug manufacturer
, beverage giant
Coca Cola Co.
UnitedHealth Group Inc.,
A H 0.02%
parent of the largest health insurer in the country.
Loan program announcements – on March 23, when the Fed announced it would buy investment grade debt, and on April 9, when it said it would include the debt of so-called fallen angels which had been demoted from investment grade after March 22 — helped drastically reduce borrowing costs for a range of businesses.
Some critics have questioned whether the Fed should buy bonds in the secondary market because debt is now so cheap.
Fed Chairman Jerome Powell defended the buying in a hearing before Congress earlier this month. Markets reacted strongly to the central bank’s announcement as investors expect the Fed to follow through on these purchases.
“We think we have to follow through and do what we said we were going to do,” he said.
The Fed will increase or decrease the amount of bonds it purchases based on various measures of how the market works. While these measures indicate lasting improvement to previously prevailing levels the coronavirus pandemic disrupted markets in March, Fed buying “would slow down noticeably and in some cases could come to a complete stop,” the New York Fed said earlier this month.
The Fed may not buy the maximum of $ 250 billion it has allocated to the program by September 30.
On the other hand, purchases would increase “if these measures subsequently indicate a deterioration in the functioning of the market,” he said.
The Fed also disclosed $ 6.8 billion in ETF holdings that invest in corporate debt, up from $ 1.3 billion a month earlier. Funds that focus on buying lower-grade debt securities accounted for around 11% of central bank ETF purchases, up from around 17% for the period May 12-18.
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