Fed Will Begin Buying Broad Portfolio of Corporate Bonds

(Bloomberg) — The Federal Reserve said Monday that it will begin buying individual corporate bonds under its Secondary Market Corporate Credit Facility, an emergency lending program that to date has purchased only exchange-traded funds.

The central bank also added a twist to its buying strategy, saying it would follow a diversified market index of U.S. corporate bonds created expressly for the facility. The Fed built the index internally, and a spokesman couldn’t immediately say whether its details would be made public.

“This index is made up of all the bonds in the secondary market that have been issued by U.S. companies that satisfy the facility’s minimum rating, maximum maturity and other criteria,” the Fed said in a statement. “This indexing approach will complement the facility’s current purchases of exchange-traded funds.”

U.S. stocks climbed to the highs of the day after the announcement. The New York Fed said in a separate statement that purchases of bonds from eligible sellers will begin on Tuesday.

The SMCCF is one of nine emergency lending programs announced by the Fed since mid-March aimed at limiting the damage to the U.S. economy by the coronavirus pandemic. With a capacity of $250 billion it has so far invested about $5.5 billion in ETFs that purchase corporate bonds.

An index assures the Fed complies with the spirit of the law under Section 13.3 of the Federal Reserve Act which says emergency lending facilities must be broad based, and provides a mechanism for the central bank to avoid industry concentration.

(Updates with reference to index in second and final paragraphs.)