By Sebastian Pellejero and Sam Goldfarb 

Investors snapped up the debt of car makers, oil drillers and other wounded companies after the Federal Reserve said it would lend trillions more to support the U.S. economy.

The Fed's new lending programs are aimed at commercial loans, mortgages, cities, states, and companies big and small. They helped push up the iShares iBoxx $ High Yield Corporate Bond ETF, an exchange-traded fund tracking junk bonds, 6%, according to FactSet. The iShares investment-grade bond ETF rose 3.32%.

And investors now judge a wide swath of companies less likely to default on their debts: The cost of protecting $10 million of below-investment-grade corporate bonds against default for five years using credit-default swaps dropped sharply to around $500,000 as of Thursday morning, from $619,470 on Wednesday, according to IHS Markit's CDS index. For investment-grade bonds, that cost fell to $84,730, from $105,030 at Wednesday's close.

Prices for debt from companies including Ford Motor Co. registered especially large gains after the Fed said it would buy new and existing bonds from so-called fallen angels -- newly downgraded corporations that had carried investment-grade ratings from two out of the three major ratings firms through March 22. The central bank had previously said it would only buy investment-grade bonds with shorter-term maturities.

Ford's 7.45% bonds due in 2031 traded as high as 89 cents on the dollar after the Fed's announcement, according to MarketAxess, compared with 71 cents Wednesday.

Other potential beneficiaries include Continental Resources Inc. and Western Midstream Operating LP, which lost their investment-grade status after March 22. Continental Resources' 4.9% bonds due in 2044 climbed to 74 cents from 61 cents.

"In the investment market, there's never surety, but this provides a little more stability, liquidity and clarity," said David Albrycht, president and chief investment officer of Newfleet Asset Management.

Just the promise of the Fed's intervention has reignited the corporate-bond market in recent weeks. Companies issued more than $105.3 billion in investment-grade bonds in the past month, says Bank of America Global Research, with $37.7 billion of that occurring in the week ended Wednesday.

Meanwhile corporate-bond spreads, or the extra yield over U.S. Treasurys that investors demand to hold company debt, have fallen in recent weeks. After hitting a high of 3.73 percentage points on March 23, the spread for the Bloomberg Barclays U.S. Corporate Investment Grade index is now down to 2.53 percentage points as of Wednesday, according to FactSet.

The spread for the Bloomberg Barclays high-yield index is now down to 8.71 percentage points as of Wednesday, from a high of 11% on March 23.

In addition to lower-rated corporate bonds, the Fed said it will now allow purchases of new classes of debt that were excluded in the central bank's response to the 2008 financial crisis. These include purchases of triple-A-rated tranches of existing commercial mortgage-backed securities and newly issued commercial loan obligations.

The Fed is also planning to purchase as much as $500 billion of short-term debt directly from U.S. states and large cities and counties to prop up the nearly $4 trillion municipal market, which is seeing some signs of recovery after slowing to a standstill last month. The Fed will buy bonds with maturities of up to two years, it said.

The announcement is likely to disappoint some brokers, asset managers and government finance-officer trade groups who had advocated for the Fed to support much longer-term bonds and a much wider range of borrowers. The Fed said it would continue to monitor the market and whether additional measures are needed.

Florida Bond Director Ben Watkins called the program "a great start" but said the Fed should support bonds maturing in up to 30 years, as well as the debt of smaller communities. Only cities of more than one million residents and counties of more than two million residents are eligible for the program.

"This virus affects very small communities, as well," Mr. Watkins said. "What are you going to do about small rural counties and school districts?"

In government-debt markets, the yield on the benchmark 10-year Treasury note fell to 0.738%, from 0.762% at Wednesday's close, according to Tradeweb. Meanwhile the 30-year yield traded around 1.356% from 1.362% the previous day.

--Heather Gillers contributed to this article.

Write to Sebastian Pellejero at sebastian.pellejero@wsj.com and Sam Goldfarb at sam.goldfarb@wsj.com

(END) Dow Jones Newswires

April 09, 2020 14:01 ET (18:01 GMT)

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