NY Fed Says It Will Start Buying ETFs

Fed’s purchases are part of the central bank’s efforts to restore functioning to the financial markets during the coronavirus pandemic

The Federal Reserve Bank of New York said Monday that starting Tuesday one of its emergency market support facilities will begin buying corporate-bond exchange-traded funds, in a notable expansion of the central bank’s efforts to support the economy and financial system in the coronavirus crisis.

The central bank’s Secondary Market Corporate Credit Facility will be the tool used to buy the ETFs, which the Fed said will be mainly investment grade corporate bonds, though some will be high-yield. BlackRock Inc. was hired to manage the program for the Fed.

The move will be a historic milestone for the Fed, which hasn’t bought ETFs previously. The central bank, recognizing it would take longer to buy bonds, saw ETFs as a fast way to direct money rapidly into credit markets, said people familiar with the matter.

The Fed will buy corporate bonds through the facility in the near future.

In a statement, the Fed said in buying ETFs it will also consider “the composition of investment-grade and non-investment-grade rated debt, the management style, the amount of debt held in depository institutions, the average tenor of underlying debt, the total assets under management, the average daily trading volume, and leverage, if any.”

The Fed’s Secondary Market Corporate Credit Facility, along with the yet-to-launch Primary Market Corporate Credit Facility, are seeded with money from the Treasury Department.

The program to buy the ETFs, along with other facilities launched by the Fed, have been aimed at restoring functioning in the financial markets that were hard hit by the initial reaction to the coronavirus pandemic, which led to shut downs of much of the economy, and a negative turn in economic data.

The Fed has also slashed short-term rates to near zero levels and bought large amounts of Treasury and mortgage bonds, swelling its balance sheet to $6.7 trillion, from $3.8 trillion last September.

Fed officials have been upbeat about the impact of their efforts, but at the same time, the new tools have taken the central bank into parts of the market where it has never before been involved.

At his press conference at the end of April, Fed chairman Jerome Powell said “these programs benefit the economy by providing financing where it is not otherwise available,” and said, “many of these programs rely on emergency lending powers that are available only in very unusual circumstances, such as those we find ourselves in today.”

Write to Michael S. Derby at michael.derby@wsj.com

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Categories: Banking

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