In-House Analysts Assess Two Fed Corporate Bond Rescue Programs

The Fed's primary market facility never bought any newly issued bonds, because no qualified borrower had problems with issuing bonds.

The secondary market facility began buying ETFs in May 2020, and it began buying bonds in June 2020. It ended up making a total of just $14 billion in investments. It completed most of the ETF purchases within 10 weeks — by June 30, 2020 — and most of the purchases of individual bonds within 10 weeks.

But until late 2020, interest rates on investment-grade bonds were still slightly higher than before the pandemic hit.

ETFs vs. Bonds

In the spring of 2020, when the Fed still needed to help stabilize the bond market, "purchases of individual bonds had a larger impact on credit spreads than purchases of ETFs, controlling for market conditions at the time of the purchases," the analysts write. "This suggests that the pass-through from improvements in ETF market conditions to corporate bond market conditions may not be as strong."

The Implications

The New York Fed team emphasizes that the Fed was operating under unusual conditions.

"Given the dramatic effect of the announcement of the [secondary market] facility, it is natural to ask if the same results could have been achieved with a smaller facility or without the creation of the primary market facility," the analysts write.

"This is difficult to know, since the presence of liquidity often forestalls the run in the first place, meaning that the presence of the PMCCF could have bolstered investor confidence in issuers' ability to refinance and thereby allowed the issuers to access public markets, even though the PMCCF was not accessed," the analysts say.

Federal Reserve Building in Washington (Image: Shutterstock)