Fed Buys $1.3 Billion In Bond ETFs; Here's The Breakdown

David Dierking

As promised, Jerome Powell and the Federal Reserve have begun buying up corporate bond ETFs in an effort to support cash-strapped business and the U.S. economy.

The purchases are meant to provide an additional source of liquidity for companies that could struggle as the COVID-19 outbreak drags on.

With Blackrock driving the investment decisions, the initial batch of purchases included two of Blackrock's iShares ETFs, two Vanguard funds and one of State Street's SPDR ETFs.

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The Fed mostly stuck to investment-grade corporate bonds, but dabbled modestly into low-rated junk bonds.

About $190 million was dedicated to junk bond funds, with the remaining $1.1 billion going to higher quality notes. It was originally thought that the Fed, when targeting junk bonds, would focus solely on the "fallen angels", companies who were rated investment-grade at the time of issue only to be downgraded later into the junk category, but JNK and HYG are broad-based junk bond ETFs.

The decision to purchase bond ETFs is a radical deviation from the Fed's traditional methods of adding liquidity to the economy. In the past, it's stuck mostly to Treasury bills and notes as it did with the recent rescue of the overnight repo market.

The latest actions are viewed by some (including myself) as an overreach of the group's original authority, which called for maximizing employment and maintaining a low level of inflation. My main fear is that the purchase of bond ETFs will eventually lead to the purchase of stock ETFs, resulting in the federal government essentially turning corporations into partially state-owned enterprises.

The Fed's goal now appears to be inflating asset prices and reacting at the first sign of any trouble. Its balance sheet now sits at more than $7 trillion with little sense of when it will be wound down, if ever.

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