Expanding its earlier decision to buy corporate bonds from the primary market, the Fed announced that it will also buy individual corporate bonds from the secondary markets, with a maturity period of five years or less. Dow Jones reacted with a growth.
By Bhushan Akolkar
Updated
3 mins read
After early market correction on Monday, Wall Street investors started cheering in the closing hours of the day. Recovering their early losses, stocks started jumping after the Federal Reserve (Fed) announced new recovery measures from the impact of the coronavirus pandemic.
The rising number of COVID-19 cases continue to cast a shadow on the economic recovery. However, Monday’s announcement by the Fed brought back confidence in the market. The Dow Jones Industrial Average (INDEXDJX: .DJI) ended the day 150 points higher (0.62% positive) closing at 25,763.16. The S&P 500 (INDEXSP: .INX) gained 0.8% closing above 3000 levels and the Nasdaq Composite (INDEXNASDAQ: .IXIC) also advanced 1.4% closing above 9700 levels.
A majority of the banking and tech company stocks need the day with 1% positive.
On Monday, the Federal Reserve announced that it will be adopting a broader approach to corporate buying. Earlier in April 2020, the Fed said that it would directly buy the corporate bonds from the primary markets. However, Monday’s announcement shows that the Fed is all set to expand its bond purchase in the secondary market as well.
Under its latest program, the Fed can buy up to $750 billion worth of corporate credit from the secondary market. This clearly shows the willingness of it to support credit markets during the pandemic situation.
This announcement from the Fed caused the markets to pull higher driving wider optimism among the investors. Fed’s decision comes in a week’s time after the Federal Open Market Committee taking cognizance of the U.S. economy in this pandemic situation.
In the primary market, the Fed’s purchase of the ETFs will continue as announced. But in the secondary market, the Fed will buy corporate bonds with remaining maturities of five years or less. In its press release, the Fed said that its intent of individual debt purchases is to “create a corporate bond portfolio that is based on a broad, diversified market index of U.S. corporate bonds”. It added:
“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. This indexing approach will complement the facility’s current purchases of exchange-traded funds”.
Just as the Fed announced its measures on Monday, experts started weighing the potential impact of its move. Ilya Feygin, a senior strategist at WallachBeth Capital, told CNBC:
“The Fed is always going to try and show who’s boss. It’s continuously proving it can do more and it’s effective. That’s been the primary driver of this market.”
Steven Friedman, a senior macroeconomist at MacKay Shields, said:
“The decision to buy a broad portfolio of corporate bonds represents a shift to a more active strategy for the secondary market corporate credit facility, rather than the passive approach originally envisioned”.
Speaking about the economic recovery from the COVID-19 effect, Freidman added that the aggressive bond-buying strategy of the Fed “may also reflect the Committee’s view that the economic recovery from the ongoing COVID-19 crisis will be an extended and challenging one, with credit markets requiring extensive support”.
Bhushan is a FinTech enthusiast and holds a good flair in understanding financial markets. His interest in economics and finance draw his attention towards the new emerging Blockchain Technology and Cryptocurrency markets. He is continuously in a learning process and keeps himself motivated by sharing his acquired knowledge. In free time he reads thriller fictions novels and sometimes explore his culinary skills.
