Fed Purchases Account For More Than 50% Of New Cash In Some Bond ETFs

David Dierking

The Federal Reserve has been buying both corporate bond ETFs and individual corporate bonds over the past two months. Its buying spree has only started and it's already become a major player in the fixed income market.

According to its latest update, the Fed now owns nearly $8 billion worth of corporate bond ETFs spread across 16 different funds.

Screen Shot 2020-07-10 at 10.14.24 AM
source: Federal Reserve

Much of that amount is spread across investment-grade products, but there's a fairly sizable position in junk bonds as well.

It's unclear how much bigger this number will get since the Fed has already talked about unwinding these positions and Jerome Powell has mentioned focusing more on individual issues instead of ETFs.

Part of the reason for the slowdown could be due to the worry that the Fed's positions in these funds could get too large. The Fed currently owns about 3% of the total assets in these ETFs, not a huge number but also far from insignificant.

In some cases, the Fed is accounting for more than half of all new cash into the fund.

Screen Shot 2020-07-10 at 10.20.48 AM
source: ETF.com

That's the case for the SPDR Portfolio Intermediate-Term Corporate Bond ETF (SPIB), the Vanguard Short-Term Corporate Bond ETF (VCSH) and the SPDR Portfolio Short-Term Corporate Bond ETF (SPSB). It's nearly the case also for the iShares Short-Term Corporate Bond ETF (IGSB) and the iShares Broad U.S. Dollar Investment-Grade Corporate Bond ETF (USIG).

I'm sure the Fed doesn't want to become a huge shareholder in these funds, which may explain its desire to move more into individual issues. It could provide more targeted exposure into the issues it feels need the most assistance.

As ETF.com notes in its original article, the Fed could taketh away as easy as it giveth.

Fed buying has offered a lot of support for the corporate bond market and that has helped push share prices higher. If it does indeed commence in unwinding its positions soon, that could put just as much as downward selling pressure on prices as a flood of supply hits the market.

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