Federal Reserve Will Buy Junk Bond ETFs

The central bank expanded the scope of its Secondary Market Corporate Credit Facility.

Senior ETF Analyst
Reviewed by: Sumit Roy
Edited by: Sumit Roy

High yield bond ETFs surged on Thursday after the Federal Reserve announced it would consider purchasing them under its Secondary Market Corporate Credit Facility. The two biggest funds in the space, the iShares iBoxx USD High Yield Corporate Bond ETF (HYG) and the SPDR Bloomberg Barclays High Yield Bond ETF (JNK), jumped 6.6% each, hitting their highest levels in five weeks. 

HYG Surges


Expanding Scope & Size

In its press release, the Fed said it would expand the size and scope of the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF), as well as the Term Asset-Backed Securities Loan Facility. Together, the three programs will support “up to $850 billion in credit backed by $85 billion in credit protection provided by the Treasury.”

The PMCCF is intended to purchase initial debt issues from corporate borrowers, while the SMCCF is designed to purchase corporate debt on secondary markets—including ETFs.

Previously, as announced in its March 23 unveiling of the facility, the SMCCF was only allowed to purchase individual investment-grade corporate bonds and investment-grade corporate bond ETFs such as the iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD).

Now, the Fed will expand the program to include individual corporate bonds that were downgraded from investment grade to junk bond status after March 22, as well as ETFs “whose primary investment objective is exposure to U.S. high-yield corporate bonds.”

That means that funds like HYG and JNK will likely be considered, though the Fed notes that the preponderance of its ETF holdings will remain ETFs “whose primary investment objective is exposure to U.S. investment-grade corporate bonds.”

The Fed added that it will buy a maximum of 20% of any single ETF’s shares.

Muni Bond Purchases

In addition to updating its corporate bond buying facilities, the Fed took a host of other actions. The central bank created the new Municipal Liquidity Facility to support lending to U.S. states, cities and counties. This facility will have the ability to purchase up to $500 billion of short-term notes from eligible issuers.

“The facility will purchase up to $500 billion of short-term notes directly from U.S. states (including the District of Columbia), U.S. counties with a population of at least two million residents, and U.S. cities with a population of at least one million residents. Eligible state-level issuers may use the proceeds to support additional counties and cities,” the central bank said.

The SPDR Nuveen Bloomberg Barclays Short Term Municipal Bond ETF (SHM), which holds securities similar to what the Fed may buy, was last trading up by 0.40%.

Small Business Lending Facilities

Meanwhile, broader markets were also embracing the Fed’s move to bolster the Paycheck Protection Program (PPP), a $350 billion program created under the CARES Act that provides loans to small businesses so that they can keep workers on payrolls.

Under the Paycheck Protection Program Lending Facility, the Fed “will lend to all depository institutions that originate PPP loans, taking the loans as collateral at face value.”

At the same time, the Fed’s Main Street Lending Program will provide support to businesses with up to 10,000 workers or with revenues of less than $2.5 billion. The program offers four-year loans, with the ability for companies to defer interest and principle payments one year.

As with the PPP, banks will originate the loans. They will then sell 95% of the loans to the Main Street facility, which can purchase up to $600 billion worth of loans.

The S&P 500 rallied 1.5% on the Fed’s host of new and updated programs, putting the index on track for its best week of gains since 1974.

Email Sumit Roy at [email protected] or follow him on Twitter sumitroy2

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.