The FED Has Helped Boost Blackrock’s Business


Blackrock has new customers after being employed by the Federal Reserve to aid in mitigating the economic fallout.

There is scrutiny that the Fed gave Blackrock an unfair advantage over rivals, according to TechnoCodex.

Blackrock, the world’s largest fund manager, was hired by the central bank to aid in the bond buyback program. The Financial Markets advisory consulting arm will manage $750 billion on behalf of the Fed. The fund manager already oversees over $2.2 trillion in fixed-income assets. The Fed started buying corporate bond exchange traded funds to help expedite its efforts to stabilize US bond markets.

However, Blackrock has seen a massive influx of investors looking to buy its corporate bond ETFs following the partnership. Last month, Blackrock’s LQD corporate bond ETF saw a $4.3 billion influx. This figure is massive compared to the $33 million and $15 million competitors Vanguard and State Street reported.

Blackrock’s ETF, LQD, now has $45.2 billion under its belt. “The corporate bond market turned on a dime in April as investors saw the Fed’s decision to use corporate bond ETFs as an opportunity to front-run the buying by the central bank,” said Ben Johnson, director of passive funds research at Morningstar.

Critics are citing that Blackrock CEO Larry Fink’s advising to US policymakers won the firm the contract. Fink had a meeting with President Donald Trump on March 18, close to the bottom of the sell off.

The Fed did not consult with other fund managers because of the timeliness of the situation. But choosing Blackrock as its partner “created an unintended advertising effect for its ETFs”, said a former Fed official.

ETF competitors believe that Blackrock’s ETFs should be excluded from the bond buying program. Blackrock has pledged to return any income to the central bank, apart from its fees earned by FMA.

Peter Sleep, a senior portfolio manager at Seven Investment Management disagrees with ETF competitors stating that Blackrock’s ETFs should be excluded from the program. “It would be dumb to exclude BlackRock’s ETFs from the Fed buying program given it has a 70 per cent market share and the narrowest bid offer spreads,” he said. “Buying bond ETFs with wider spreads would only enrich market makers and they are not refunding any of their profits.”

The bond buying program started on May 12, with a $305 million influx into US corporate bond ETFs. Weekly updates are provided on the Federal Reserve website on Thursdays, but do not include ETF tickers.

Blackrock has benefited from this contract agreement and will probably make extra money. With the world in crisis mode, the central bank deemed these actions necessary.

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Economics, Finance and Investing