• 21 hours Markets Unfazed As Inflation Hits 13-Year High
  • 2 days How the Token Economy is Disrupting Financial Markets
  • 4 days FBI Investigating 100 Types Of Ransomware Attacks
  • 6 days Fed Ends Corporate Credit Emergency Lending Program
  • 8 days AMC Becomes the Latest Winning Meme Stock After GameStop
  • 9 days The Real Reason Your 401k Has Been Lagging
  • 10 days China Lifts Cap On Births, Allows Three Children Per Couple
  • 12 days The Market Is Ripe For Another GameStop Saga
  • 15 days Senate Grills Big Banks Over Pandemic Opportunism
  • 16 days Cannabis Has A Major Cash Problem
  • 17 days Ransomware Netted Criminals $350M In 2020 Alone
  • 18 days Russia Is Taking On Google
  • 19 days Chinese Regulators Deal Another Big Blow To Bitcoin
  • 20 days Ohio Residents Brave Vaccine for Chance To Win $1M
  • 22 days Inflation Is Coming. Are You Prepared?
  • 23 days 3 World-Shaking Trends Investors Need To Watch This Year
  • 23 days Travel Might Get Another Supersonic Disruption
  • 24 days The World Is Running Out Of 6 Key Resources
  • 25 days $15/Hour Minimum Wage Might Happen Naturally
  • 27 days Money-Laundering Binance Probe Report Adds To Bitcoin Woes
The Pandemic Has Culled The Middle Class

The Pandemic Has Culled The Middle Class

In 2020, while the global…

Markets Unfazed As Inflation Hits 13-Year High

Markets Unfazed As Inflation Hits 13-Year High

Wall Street stocks have mostly…

  1. Home
  2. Markets
  3. Economy

Fed Ends Corporate Credit Emergency Lending Program

Fed Ends Corporate Credit Emergency Lending Program

On Wednesday, the Federal Reserve unveiled plans to begin selling its corporate debt in the Secondary Market Corporate Credit Facility ("SMCCF"), an emergency lending facility that helped support credit markets during the pandemic crisis.

The move completes the central bank’s move away from market support programs it launched last year as part of a Covid-19 relief program. Five of those emergency facilities expired in late 2020.

The Fed says that as corporate bond spreads widen, the SMCCF portfolio sales will occur gradually and orderly and will aim to minimize the potential for any adverse impact on the bond markets including daily liquidity and trading conditions for ETFs and corporate bonds.

Corporate bonds appear to have taken the news in stride, with the largest credit ETF, iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEARCA:LQD) slightly down. The U.S. weekly fund flows insight report by Refinitiv Lipper ending June 2nd, 2021, shows that LQD saw outflows of $605 million during the week. LQD has $40.4B in assets under management (AUM).

Which is perhaps to be expected considering that the Fed’s move to unwind its corporate-bond portfolio is relatively minor compared to any future quantitative easing (QE) measures it might unveil in the future. As per the central bank’s latest report, the Fed owned $13.8 billion in bonds and bond ETFs, a minuscule percentage of the overall corporate bond market of more than $10 trillion, according to the Securities Industry and Financial Markets Association.

Fed’s holdings make up between 0.5% and 7.2% of each fund’s market capitalization.

Surprise move

Wall Street has taken divergent views of the Fed’s latest mini-QE.

Bank of America strategists have raised concerns about the move, pointing at the Fed’s checkered track record when it comes to QE programs.

“Clearly the Fed has little in terms of a successful track record in selling assets and also by far most of the time merely adjusts policy to market expectations. This is why the Fed’s announcement today--which was 100% surprising--to begin gradually selling their portfolio of corporate debt acquired during the liquidity crisis last year is very negative for risk assets. Clearly the Fed feels sufficiently emboldened by the scarcity of credit assets in the front end of the curve and high valuations to be comfortable testing markets in this way,” the bank has said.

Citigroup ETF strategists have adopted a more positive stance, labeling the Fed’s “timing a bit surprising, but not unreasonable.” Citigroup had originally estimated that it would take years to “fully unwind” the emergency portfolio; however, the bank says that “a more speedy unwind of ETFs does help ensure a profit is returned to the Treasury, which is definitely a bonus from the facility.’’

Citigroup does note that “Messaging and concerns of further monetary policy tightening could make investors somewhat nervous, hence some modest softness in credit ETFs today.”

Although the Fed has in the past been clear that its QE policy will only change when the data on unemployment and inflation changes, pressure from this policy is gradually building in the banking sector, as well as the treasury and repo markets. Goldman Sachs, JPMorgan,  Citi and Morgan Stanley have talked about the stress being put upon their institutions by the more than $3 trillion of bank reserves created by the Fed in 2020.

The Fed has continued buying bonds at a tepid pace of $120 billion a month with Fed chairman Jerome Powell maintaining it is still too early to even talk about tapering. Unfortunately, this wall of deposited liquidity means that the Wall Street banks must issue billions in bonds and preferred equity in a bid to try and stay within their supplementary leverage ratios (SLRs). 

The March 2021 expiration of the exemption on U.S. securities and deposits held at Fed banks in banks’ total leverage exposure has only made that exercise harder.

By Alex Kimani for Safehaven.com

Back to homepage

Leave a comment

Leave a comment