Fed Promised to Buy Bonds But Is Finding Few Takers

Matty-Sways

Companies fear stigma of borrowing from a backstop program and having additional restrictions placed on them.

The Federal Reserve loosened credit markets in March by promising a ‘whatever-it-takes’ program to purchase corporate bonds. The initiative aims to allow the Fed to buy limited amounts of new and preexisting bonds of companies.

The program has yet to officially launch as the Fed figures out technical details. The Fed should launch soon so that it can start making purchases quickly if markets seize up again.

“There is a lot of uncertainty about what the Fed is going to do in the near term,” said Arvind Narayanan, co-head of investment-grade credit at Vanguard Group.

Companies can participate if they are certified US-based and have not received other aid under the Cares Act, a $2 trillion financial relief package that provides loans and grants to businesses. Some investors are tired of waiting for the program launch, especially since buying investment-grade bonds in recent months with the intention of selling them.

However, the Fed has failed to buy any bonds ten weeks into the program, which would disclose the participants’ names, the quantity of bonds that the Fed purchases from them, and the prices paid. Such conditions “could give bond issuers pause, especially those that already have access to the markets,” said Narayanan.

Companies resist signing up for the Fed purchase program, because this action could signal weakness during a market rebound. Some companies do not want the Fed buying their bonds now, because this action would limit the quantity the central bank could purchase if another wave of COVID-19 affects the markets.

“I really don’t think the market needs it anymore,” said Columbia Threadneedle Investments portfolio manager Thomas Murphy. “They are the victims of their own success.”

The Fed needs to roll out the backstop program to ensure its long-term credibility with investors, explained Murphy. The central bank wants markets to react to policies upon announcement, rather than waiting for implementation.

However, investors may question future changes if the Fed does not follow through with the corporate bond buying facility. This might “reduce the effectiveness of the next thing the Fed announces in the next crisis,” according to Murphy.

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