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The comments here confuse me. The Fed is buying bond ETFs so that it can provide support to the corporate debt market in a way that doesn't 1) require a ton of

The comments here confuse me. The Fed is buying bond ETFs so that it can provide support to the corporate debt market in a way that doesn't 1) require a ton of careful, time-consuming credit risk analysis and 2) doesn't favor individual issuers. The goal is to improve credit conditions and provide financing that otherwise wouldn't be available to companies during this crisis. This isn't manipulation of the stock market, it's making sure credit markets don't dry up at the worst possible time and exacerbate the damage. The funding here is $75 Billion from the Treasury Department (authorized by Congress) and like other Fed facilities the money isn't disappearing into the void; the Fed will eventually unwind these positions or allow them to runoff its balance sheet. As much as I love Matt Levine, maybe having an article with a higher information density would reduce the number of low-effort comments. Something like this article[0] maybe, dang? [0] https://www.wsj.com/articles/bond-etfs-climb-as-the-fed-kicks-off-historic-purchase-program-11589296012 https://www.wsj.com/articles/bond-etfs-climb-as-the-fed-kick...

whatok 6y ago
The Fed buying bond ETFs is a small portion of the overall SMCCF. They are buying bond ETFs right now because the issuer certification process for buying individual bonds has been dragged out and right now it seems that not many issuers want to register because of backlash from PPP. I agree with your two initial points in the context of the Fed ONLY buying ETFs but that's only a small portion of the overall facility. With secondary bond purchases, the Fed is absolutely going to be favoring individual issuers not willingly but through the design of the program and the form of individual issuers' capital structures. If the Fed wanted to rush a program out to only buy ETFs, they did not need to take almost two months to do so. The underlying corporate bonds were the main target of this program, they ran into some operational problems launching that portion of the facility, and decided to go ahead with the ETF portion. Agreed on the Matt Levine. He's fine for certain things but it seems like he's the ultimate source for tech people who want to talk about finance and he's not always right/is only one side of the story.
adrr 6y ago
They could just look at the etf holdings and buy paper based on that. If you’re buying billions of debt, you don’t buy an etf and pay management fees. Backlash is going to be huge when the public finds out how much these fund managers take home in bonuses with all this new capital flowing into their funds.
- whatok 6y ago
  Blackrock is waiving ETF fees for this facility (don't know off the top of my head if other providers are as well) and overall fees for managing these facilities are not great. The Fed does not have the operational expertise to manage these facilities in-house. You could make an argument if all they were buying was ETFs but a majority of the facility is for corporate bonds and things can go real wrong if you don't know what you're doing there.
SilasX 6y ago
Well, stupid question then: why would this prop up the debt market? They're just buying tokens redeemable[1] for a basket of bonds. How does that prop up (the underlying) bond prices? Or their liquidity? ETF prices are pretty firmly anchored to the underlying bond basket prices, due to arbitrage, so prices only flow from the bonds to the ETF shares, never the other way around. Is there a dynamic I'm missing whereby the purchase of ETFs make the bonds more valuable on the market? For an analogy, let's say there are coupons you can redeem for a 20-lb turkey at Trader Joe's (analogous to bond ETFs, which are redeemable for baskets of the underlying). Let's say they trade on a secondary market (like those coupon selling sites) at a stable discount to the market price of the turkeys at TJ's. Let's say I go out and start buying up the coupons with reckless abandon. I accept that they would then trade at a smaller discount to TJ turkeys. But why would that raise the market price of the turkeys themselves? Nothing about that makes the turkeys themselves more in-demand, does it? [1] which is how I understand ETFs to work and maintain value parity
- whatok 6y ago
  There's a few faulty assumptions that might apply to more liquid and efficient markets but do not apply to corporate bonds. Corporate bond liquidity is minuscule and many create/redeems are done with incomplete baskets vs actual underlying. One of the reasons why the Fed decided to include ETFs in this facility is because the ETFs were trading at a steep discount to NAV at some points earlier this year. For example, SPY's largest discount to NAV this year was around 80bps. For LQD (the largest and most liquid IG ETF), the largest discount was close to 5.1%. Discounts to NAV of that size are not academically arbed away with illiquid underlying assets because there's no liquidity or price discovery happening in those assets either.
  - SilasX 6y ago
    Okay but that doesn't address why buying up the ETF would bid up the underlying, it just shows that a discount against NAV exists and Fed intervention could shrink it (just as my intervention could in my turkey example). Alternatively, the goal could be to do nothing about the 80 bps or whatever discount, but keep it the same while pushing up ETF share price and NAV together ... but I don't see why this intervention would do that, either.

whatok 6y ago

The Fed buying bond ETFs is a small portion of the overall SMCCF. They are buying bond ETFs right now because the issuer certification process for buying individual bonds has been dragged out and right now it seems that not many issuers want to register because of backlash from PPP. I agree with your two initial points in the context of the Fed ONLY buying ETFs but that's only a small portion of the overall facility. With secondary bond purchases, the Fed is absolutely going to be favoring individual issuers not willingly but through the design of the program and the form of individual issuers' capital structures. If the Fed wanted to rush a program out to only buy ETFs, they did not need to take almost two months to do so. The underlying corporate bonds were the main target of this program, they ran into some operational problems launching that portion of the facility, and decided to go ahead with the ETF portion. Agreed on the Matt Levine. He's fine for certain things but it seems like he's the ultimate source for tech people who want to talk about finance and he's not always right/is only one side of the story.

adrr 6y ago

They could just look at the etf holdings and buy paper based on that. If you’re buying billions of debt, you don’t buy an etf and pay management fees. Backlash is going to be huge when the public finds out how much these fund managers take home in bonuses with all this new capital flowing into their funds.

whatok 6y ago
Blackrock is waiving ETF fees for this facility (don't know off the top of my head if other providers are as well) and overall fees for managing these facilities are not great. The Fed does not have the operational expertise to manage these facilities in-house. You could make an argument if all they were buying was ETFs but a majority of the facility is for corporate bonds and things can go real wrong if you don't know what you're doing there.

SilasX 6y ago

Well, stupid question then: why would this prop up the debt market? They're just buying tokens redeemable[1] for a basket of bonds. How does that prop up (the underlying) bond prices? Or their liquidity? ETF prices are pretty firmly anchored to the underlying bond basket prices, due to arbitrage, so prices only flow from the bonds to the ETF shares, never the other way around. Is there a dynamic I'm missing whereby the purchase of ETFs make the bonds more valuable on the market? For an analogy, let's say there are coupons you can redeem for a 20-lb turkey at Trader Joe's (analogous to bond ETFs, which are redeemable for baskets of the underlying). Let's say they trade on a secondary market (like those coupon selling sites) at a stable discount to the market price of the turkeys at TJ's. Let's say I go out and start buying up the coupons with reckless abandon. I accept that they would then trade at a smaller discount to TJ turkeys. But why would that raise the market price of the turkeys themselves? Nothing about that makes the turkeys themselves more in-demand, does it? [1] which is how I understand ETFs to work and maintain value parity

whatok 6y ago
There's a few faulty assumptions that might apply to more liquid and efficient markets but do not apply to corporate bonds. Corporate bond liquidity is minuscule and many create/redeems are done with incomplete baskets vs actual underlying. One of the reasons why the Fed decided to include ETFs in this facility is because the ETFs were trading at a steep discount to NAV at some points earlier this year. For example, SPY's largest discount to NAV this year was around 80bps. For LQD (the largest and most liquid IG ETF), the largest discount was close to 5.1%. Discounts to NAV of that size are not academically arbed away with illiquid underlying assets because there's no liquidity or price discovery happening in those assets either.
- SilasX 6y ago
  Okay but that doesn't address why buying up the ETF would bid up the underlying, it just shows that a discount against NAV exists and Fed intervention could shrink it (just as my intervention could in my turkey example). Alternatively, the goal could be to do nothing about the 80 bps or whatever discount, but keep it the same while pushing up ETF share price and NAV together ... but I don't see why this intervention would do that, either.