U.S. Companies Race to Tap Corporate Bond Market as Fed Preps Historic $100 Billion Purchase Plan

The Fed's plan to buy corporate bonds has eased corporate borrowing costs and sparked a race for new debt sales from some of Americas biggest companies.
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U.S. companies are rushing to issue new debt as benchmark interest rates hold at historic lows and the Federal Reserve gets ready to intervene in the in the corporate bond market with an historic change in its quantitative easing strategy.

United Parcel Service  (United Parcel Service) , General Dynamics  (GD) - Get Report, 3M  Co.  (MMM) - Get Report, Deere & Co  (DE) - Get Report and Pfizer Inc. PFE have all filed papers with the Securities and Exchange Commission to issue new debt Wednesday, following similar requests and sales from Lowe's Companies  (LOW) - Get Report, Coca-Cola  (KO) - Get Report, Mastercard  (MA) - Get Report and Kimberly Clark  (KMB) - Get Report earlier this week.

The Fed said earlier this week that, alongside an historic move to buy unlimited amounts of government debt and mortgage-backed securities, it will also, for the first time, purchase around $100 billion in corporate debt in order to "support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy."

"The Fed is now effectively the direct lender of last resort to the real economy, not just the financial system," said Ian Shepherdson of Pantheon Economics. "Open-ended QE—this always looked inevitable—plus purchases of both primary and secondary market corporate bonds, and bond ETFs, for investment grade businesses (BBB/Baa3 or above) represents a huge easing." 

"It removes one key element of the uncertainty facing investors, though the other two—the extent and duration of the spread of the disease, and the ultimate fiscal response—are still unknown," he added.

Corporate borrowing costs, however, have risen to the highest levels since 2009 this week even after the Fed cut its benchmark Fed Funds rate to a record low 0% to 0.25% on March 15. 

In fact, even investment grade companies, or those deemed to have the strongest balance sheets, are paying around 4% more than the U.S. government to borrow money for ten years. That's up from around 2.75% at the start of the year.  

The BlackRock iShares investment-grade bond ETF  (LQD) - Get Report, however, has risen nearly 10.9% from its Friday close to trade at $118.45 in early Wednesday dealing. The iShares iBoxx High Yield ETF  (HYG) - Get Report, meanwhile, was marked 2.13% higher Wednesday at $72.98

Corporate borrowing costs are also likely to ebb following last night's agreement between Senate lawmakers that will provide around $500 billion in direct support -- via loans or grants -- to the country's most important industries.

Fed data suggests around $9.6 in corporate bonds were trading in the market at the end of last year, a 74% increase from 2008 when the central bank slashed its benchmark rate to 0% in the wake of the global financial crisis.