Credit & Capital

Fed to Unwind Emergency Corporate Bond Program

The Federal Reserve’s first foray into corporate debt "proved vital in restoring market functioning" during the COVID-19 pandemic.
Matthew HellerJune 3, 2021

The Federal Reserve has announced it will begin winding down the first-of-its-kind program created to support the corporate bond market during the COVID-19 pandemic.

The Secondary Market Corporate Credit Facility, the Fed’s first foray into corporate debt, was part of a suite of programs established by the Fed and Treasury to shore up financial markets roiled by the pandemic.

As of the central bank’s most recent report, it held $5.21 billion of bonds from companies including Whirlpool, Walmart, and Visa and $8.56 billion of exchange-traded funds that hold corporate debt, such as the Vanguard Short-Term Corporate Bond ETF. The related Primary Market Corporate Credit Facility never made a purchase.

“The SMCCF proved vital in restoring market functioning last year, supporting the availability of credit for large employers, and bolstering employment through the COVID-19 pandemic,” the Fed said in a news release.

It added that portfolio sales “will be gradual and orderly, and will aim to minimize the potential for any adverse impact on market functioning by taking into account daily liquidity and trading conditions for exchange-traded funds and corporate bonds.”

According to a Fed official, the sales, which should be completed by the end of this year, are unrelated to monetary policy.

As The New York Times reports, the corporate bond effort “was perhaps the most controversial of the Fed’s 2020 relief programs, drawing criticism from some Democrats who felt that the central bank was helping big companies more than smaller ones and households.”

But according to The Wall Street Journal, the Fed’s announcement of the two corporate bond programs “quickly restored investor confidence in major corporations’ ability to issue debt.”

The Fed stopped purchasing assets under the SMCCF on Dec. 31, 2020. Its ETF holdings ranged from 0.62% to 7.2% of each fund’s market capitalization.

“A more speedy unwind of ETFs does help ensure a profit is returned to the Treasury, which is definitely a bonus from the facility,” said ETF strategists at Citigroup, who had originally estimated it would take years for the Fed to “fully unwind” its portfolio.