Fed Promised to Buy Bonds but Is Finding Few Takers
June 03 2020 - 5:59AM
Dow Jones News
By Matt Wirz
The Federal Reserve thawed credit markets in March by promising
a whatever-it-takes program to buy corporate bonds. Ten weeks
later, the Fed has yet to buy a single bond.
Just the announcement of the backstop ended panic selling,
boosted prices and fueled a record surge of new corporate-bond
sales. Companies are now reluctant to sign up for Fed purchases
because such a move could be seen as a sign of weakness during a
market rebound, some bond fund managers and bank executives
said.
"I really don't think the market needs it anymore," said
Columbia Threadneedle Investments portfolio manager Thomas Murphy.
"They are the victim of their own success."
The Fed has yet to officially launch the initiative, which
enables it to buy limited amounts of new and pre-existing bonds of
companies, in part because it is hashing out the technical details.
Only companies that certify they are U.S.-based and haven't
received other aid under the Cares Act -- a $2 trillion
financial-relief package that includes loans and grants to
businesses -- can participate in the program, which would disclose
their names, the amount of their bonds that the Fed would purchase
and the prices paid.
Those terms "could give bond issuers pause, especially those
that already have access to the markets," said Arvind Narayanan,
co-head of investment-grade credit at Vanguard Group, which manages
$1.8 trillion of fixed-income assets.
The Fed indirectly bolstered corporate-bond prices in May by
purchasing $3 billion in shares of exchange-traded bond funds. But
that is a fraction of the up to $750 billion earmarked for
corporate debt purchases.
The program should be "ready to go by the end of this month,"
Fed Chairman Jerome Powell said in Senate testimony in May. "I
don't say that it won't be a day or two into June, but that's our
expectation." A spokeswoman for the Federal Reserve Bank of New
York declined to comment beyond Mr. Powell's statement.
Fear of stigma isn't the only thing deterring participation.
Some companies don't want the Fed buying their bonds now because
that would limit how much the central bank could purchase if
another wave of coronavirus roils markets, said one investment
banker who covers large U.S. corporations. The Fed can't use more
than 1.5% of its backstop funds to lend directly to any single
company, according to disclosures by the New York Fed.
Still, the Fed needs to launch the program soon so that it can
start making purchases quickly if markets seize up again, Mr.
Narayanan said.
Some investors who bought investment-grade bonds in March and
April with plans to sell them eventually to the Fed are growing
weary of waiting, said Hans Mikkelsen, a bond strategist at Bank of
America.
"There is a lot of uncertainty about what the Fed is going to do
in the near term," he said.
An unusually large $500 million bundle of investment-grade bonds
that traded last week was likely unloaded by one such "tourist"
investor, Mr. Mikkelsen said. The portfolio included short-term
bonds of such blue-chip companies as Caterpillar Inc. and
International Business Machines Corp., which rallied steeply in
April and have posted muted gains since.
Caterpillar's 3.9% bond due in 2021 traded at around 103.50
cents on the dollar Tuesday, roughly unchanged from the start of
May, according to data from MarketAxess
The Fed also needs to roll out the backstop to ensure its
long-term credibility with investors, Mr. Murphy said.
The central bank wants markets to react to policies when they
are announced, rather than waiting for them to be enacted, which
can take weeks or months. But if it doesn't set up the corporate
bond buying facility, investors might second-guess future
proclamations, Mr. Murphy said.
Failing to deliver could "reduce the effectiveness of the next
thing the Fed announces in the next crisis," he said. "We all know
there will be one."
Write to Matt Wirz at matthieu.wirz@wsj.com
(END) Dow Jones Newswires
June 03, 2020 05:44 ET (09:44 GMT)
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