The Federal Reserve said that it would start selling the corporate bonds and fixed income funds that it bought to stabilise the financial system last year, unwinding unprecedented emergency measures that electrified markets and brought down borrowing costs for companies reeling from the pandemic.
The US central bank said on Wednesday that assets acquired through its so-called Secondary Market Corporate Credit Facility, or SMCCF, would be sold gradually. The aim is to wrap up the process by the end of the year, according to a Fed official.
The facility, which combined capital from the US Treasury with the central bank’s own resources, acquired corporate bonds and exchange traded funds in the secondary market. It was rolled out in April last year alongside 12 other facilities aimed at supporting a range of debt markets that had come under severe pressure as the US economy shut down.
Usage of the SMCCF and another facility aimed at supporting the primary corporate debt market totalled less than $14bn, under 2 per cent of the $750bn available, according to Fed data.
The Fed touted the limited usage as testament to its success in restoring market functioning quickly, simply by pledging its support. Corporate bond prices rallied and companies hamstrung by the pandemic remained able to access capital markets.
The central bank had also already slashed interest rates to zero and committed to buying an unlimited quantity of US government debt.
“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 statement on Wednesday.
“SMCCF portfolio sales will be gradual and orderly, and will aim to minimise 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.”
Investors largely brushed aside the announcement, in part because the Fed’s actual presence in the market was quite limited. The facility has been shut to new purchases since the end of December, following a decision by the US Treasury.
“It is hard to think of a more effective tool that supported the flow of credit to companies during the pandemic,” said Patrick Leary, senior trader at Incapital.
Fed officials have also begun to debate when they may consider scaling back other emergency measures put in place during the crisis, including its $120bn monthly purchases of government and mortgage debt.
Leary said the SMCCF announcement paved the way for that discussion and the eventual removal of policy accommodation.
“This is one little step and a good way to test the waters in terms of what the market reaction is going to be,” said Leary.
Additional reporting by Brooke Fox in New York
Letter in response to this article:
Look at the counterfactual of reining in bank support / From Gray Schweitzer, New York, NY, US