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Never got why the fed is buying ETFs instead of buying corporate paper. Also why isn’t the fed buying new bonds if their goal is to inject liquidity back in

by adrr 6y ago

Never got why the fed is buying ETFs instead of buying corporate paper. Also why isn’t the fed buying new bonds if their goal is to inject liquidity back into the companies. Who are they really bailing out?

gvhst 6y ago
The Fed doesn’t do security selection. If the Fed isn’t equipped to analyze and select individuals securities. Additionally selecting individual names is a huge political concern. How do you decide which issues to buy? Personally I’d rathe the Fed buy market indices which are constructed By transparent and well understood processes instead of some opaque self brewed process. Plus the Fed is suppose to stabilize the market as a whole and provide overall liquidity to allow firms to raise money on their own. The Fed isn’t suppose to directly support individual corps. Additionally it’s important to look at how the ETFs work. I believe the ETFs in question here are LQD and HYG for investment grade and high yield respectively. These ETFs track the iboxx indicies for IG and HY. Even if the Fed is buying BlackRocks ETF, this bolsters the prices of the individual bonds, which then moves indices higher, thereby also moving up other provider’s ETFs along with the entire fixed income market. Given this is the case, one should pick the most liquid ETF for each asset class (Ideally all ETFs should be purchased weighted by the NAV or trading volume of each ETF), in that case it would be BlackRocks for US fixed income.
- nickff 6y ago
  Just to add to your first point, it's much harder to 'game' these pre-existing indices and ETFs than it would be to game some novel and arbitrary selection criteria. These ETFs have been 'vetted' by the market over the course of many years.
- whatok 6y ago
  The Fed isn't equipped to do security selection so that's why Blackrock is managing this facility. Blackrock is absolutely going to do secondary bond purchases (on the Fed's behalf) once that portion of the facility is up and running. The Fed has also said that they don't want to influence market share of ETFs so that's been interpreted as some sort of benchmark per manager. I believe Blackrock was around 50% of qualifying ETFs outstanding at the time. The Fed published purchases to date last week which has a pretty decent breakdown: https://www.federalreserve.gov/monetarypolicy/files/smccf-transition-specific-disclosures-5-29-20.xlsx https://www.federalreserve.gov/monetarypolicy/files/smccf-tr...
  - adrr 6y ago
    Fed has directly bought securities in every downturn that I know of. They bought MBS during 2007 recession. They are buying corporate paper right now directly. What they didn’t do was go bailout the mortgage REITs.
    - whatok 6y ago
      The Fed has not bought any corporate bonds yet. If you have some proof of that, please share your source. I work directly in this space, know everything that is going on and am unaware of any purchases so either I'm terrible at my job or you have some information no one else has.
      - adrr 6y ago
        You are correct. They have 700bb allocated for corporate bonds but no takers. They’ve dumped billions into MBSs and hundreds of millions into ETFs.
- adrr 6y ago
  HYG and LQD contain foreign bonds so we are bailing out foreign companies. FED is buying standard corporate paper along with these ETFs. Majority of the money that the fed is dumping into the economy is buying corporate paper to give liquidity to companies and preventing banks from failing. This secondary purchase seems like we're bailing out crappy high yield ETFs and not the actual distressed companies or preventing banks from going insolvent due to runs on deposit accounts.
  - whatok 6y ago
    The vast majority of issuers in both those ETFs (especially HYG) are US companies. A liquid ETF with substantial AUM that only holds US issuers does not exist. You'll have to blame the companies that created and marketed the benchmarks these ETFs track on that one. Also, the Fed has not purchased a single corporate bond yet so the "majority of the money" has gone to ETF purchases so far; the vast majority of the facility's capital is currently sitting in Treasuries. The mere announcement of investment grade ETF purchases re-opened the primary markets without the Fed spending a penny. High yield primary markets were completely shut for a week before the Fed said that they would purchase fallen angel bonds and HY ETFs. The whole purpose of these facilities is to make sure funding markets function properly and ensure that companies that would have been fine without the pandemic will be fine now; not bail out distressed companies that are going to go out business anyway. I don't even know what you're talking about with bank failures on this. The Volcker Rule really gutted bank prop trading and banks barely have any of this stuff on their balance sheets. It's a big portion of the reason why there was a massive lack of liquidity during the first quarter of the year.
JumpCrisscross 6y ago
> why the fed is buying ETFs instead of buying corporate paper They’re supporting lending. Not lending per se. The term of art is transmission mechanism, if you want to read on this further. Buying through ETFs lets the Fed support loan and bond prices, which encourages lending. Put another way, a dollar lent to a corporate produced $1 of lending. A dollar spent boosting prices can support more than $1 in lending. ETFs are simply an efficient way to do this. (Equity markets are more efficient than the corporate bond markets. ETFs offer equity-like execution for bond-like risk.)
- arkis22 6y ago
  A dollar of debt is a dollar, but equity can be borrowed against
tripletao 6y ago
This article is incredibly misleading. The Fed is buying ETFs instead of constituent bonds because the ETFs are a more liquid and convenient way to buy the constituent bonds. The net effect is roughly the same as if they bought all the bonds individually, just with less effort and lower transaction costs. (People seem to find it weird that a basket of securities could be more liquid than the securities themselves, and I agree that it's weird; but it seems to be true, and failing to understand that leads to grossly wrong conclusions like those of this article. Matt Levine has many excellent discussions of this effect.) BlackRock is just the administrator, and derives no benefit beyond their management fees. The direct benefit is to the sellers of the constituent bonds (whether individually or as part of the ETF), who get a higher price. There's also indirect benefit to the non-selling owners of the bonds, since that stops the price from dropping to the point they'd get a margin call and be forced to sell. That indirect benefit is the primary goal of this program, to avoid forced, cascading, 2008-style deleveraging. The Fed isn't trying to directly support the issuers (though the issuers do benefit from functioning capital markets, if they do choose to raise more money at this time). The $75B allocated for losses is just an accounting placeholder; they don't know what the losses or gains will be. Historically these kinds of programs have often ended up net profitable, though that's not that point.
- whatok 6y ago
  This is also a misleading comment. The main purpose of the Secondary Market Corporate Credit Facility is to purchase secondary market bonds and this is stated in the IMA and term sheet. The only reason why they're buying ETFs right now is because it's easier operationally and the issuer registration process for primary and secondary bond purchases has been difficult so far. They are not buying ETFs because they are "more liquid and convenient" vs underlying. The Fed also is absolutely trying to directly support issuers through these facilities and ETF purchases are an important part of this. Primary issuance is dictated by where secondary markets are trading and if some of the most liquid corp instruments (ETFs) are trading extremely wide or at a huge discount to NAV (like they were before these facilities were announced) then primary issuance will either be much more expensive or completely closed.
  - 6y ago
whatok 6y ago
The Fed has two corporate facilities in-place right now: the Primary Market Corporate Credit Facility and the Secondary Market Corporate Credit Facility. ETF purchases fall under the SMCCF. Secondary corporate bond purchases are also under the SMCCF but they have not made any purchases yet. There is an issuer registration process that is thought to carry some stigma (Google "discount window stigma" if not familiar with something similar) especially with backlash towards larger companies taking advantage of PPP. There are no issuers currently registered. As far as primary issuance goes, the same issuer registration process is in play. There are pretty punitive funding fees vs where syndicated bond issuance is right now so there's little incentive for issuers to participate in it as well. Primary corporate markets are very wide open and have been ever since they announced these facilities. Investment grade issuance is at over $1trn on the year and have been very concentrated in the last few months. The Fed has bought around $6bn in ETFs so far which is really nothing in the grand scheme of things. The main effect these facilities have had so far is restore market confidence.

by adrr 6y ago

gvhst 6y ago

The Fed doesn’t do security selection. If the Fed isn’t equipped to analyze and select individuals securities. Additionally selecting individual names is a huge political concern. How do you decide which issues to buy? Personally I’d rathe the Fed buy market indices which are constructed By transparent and well understood processes instead of some opaque self brewed process. Plus the Fed is suppose to stabilize the market as a whole and provide overall liquidity to allow firms to raise money on their own. The Fed isn’t suppose to directly support individual corps. Additionally it’s important to look at how the ETFs work. I believe the ETFs in question here are LQD and HYG for investment grade and high yield respectively. These ETFs track the iboxx indicies for IG and HY. Even if the Fed is buying BlackRocks ETF, this bolsters the prices of the individual bonds, which then moves indices higher, thereby also moving up other provider’s ETFs along with the entire fixed income market. Given this is the case, one should pick the most liquid ETF for each asset class (Ideally all ETFs should be purchased weighted by the NAV or trading volume of each ETF), in that case it would be BlackRocks for US fixed income.

nickff 6y ago
Just to add to your first point, it's much harder to 'game' these pre-existing indices and ETFs than it would be to game some novel and arbitrary selection criteria. These ETFs have been 'vetted' by the market over the course of many years.
whatok 6y ago
The Fed isn't equipped to do security selection so that's why Blackrock is managing this facility. Blackrock is absolutely going to do secondary bond purchases (on the Fed's behalf) once that portion of the facility is up and running. The Fed has also said that they don't want to influence market share of ETFs so that's been interpreted as some sort of benchmark per manager. I believe Blackrock was around 50% of qualifying ETFs outstanding at the time. The Fed published purchases to date last week which has a pretty decent breakdown: https://www.federalreserve.gov/monetarypolicy/files/smccf-transition-specific-disclosures-5-29-20.xlsx https://www.federalreserve.gov/monetarypolicy/files/smccf-tr...
- adrr 6y ago
  Fed has directly bought securities in every downturn that I know of. They bought MBS during 2007 recession. They are buying corporate paper right now directly. What they didn’t do was go bailout the mortgage REITs.
  - whatok 6y ago
    The Fed has not bought any corporate bonds yet. If you have some proof of that, please share your source. I work directly in this space, know everything that is going on and am unaware of any purchases so either I'm terrible at my job or you have some information no one else has.
    - adrr 6y ago
      You are correct. They have 700bb allocated for corporate bonds but no takers. They’ve dumped billions into MBSs and hundreds of millions into ETFs.
adrr 6y ago
HYG and LQD contain foreign bonds so we are bailing out foreign companies. FED is buying standard corporate paper along with these ETFs. Majority of the money that the fed is dumping into the economy is buying corporate paper to give liquidity to companies and preventing banks from failing. This secondary purchase seems like we're bailing out crappy high yield ETFs and not the actual distressed companies or preventing banks from going insolvent due to runs on deposit accounts.
- whatok 6y ago
  The vast majority of issuers in both those ETFs (especially HYG) are US companies. A liquid ETF with substantial AUM that only holds US issuers does not exist. You'll have to blame the companies that created and marketed the benchmarks these ETFs track on that one. Also, the Fed has not purchased a single corporate bond yet so the "majority of the money" has gone to ETF purchases so far; the vast majority of the facility's capital is currently sitting in Treasuries. The mere announcement of investment grade ETF purchases re-opened the primary markets without the Fed spending a penny. High yield primary markets were completely shut for a week before the Fed said that they would purchase fallen angel bonds and HY ETFs. The whole purpose of these facilities is to make sure funding markets function properly and ensure that companies that would have been fine without the pandemic will be fine now; not bail out distressed companies that are going to go out business anyway. I don't even know what you're talking about with bank failures on this. The Volcker Rule really gutted bank prop trading and banks barely have any of this stuff on their balance sheets. It's a big portion of the reason why there was a massive lack of liquidity during the first quarter of the year.

JumpCrisscross 6y ago

> why the fed is buying ETFs instead of buying corporate paper They’re supporting lending. Not lending per se. The term of art is transmission mechanism, if you want to read on this further. Buying through ETFs lets the Fed support loan and bond prices, which encourages lending. Put another way, a dollar lent to a corporate produced $1 of lending. A dollar spent boosting prices can support more than $1 in lending. ETFs are simply an efficient way to do this. (Equity markets are more efficient than the corporate bond markets. ETFs offer equity-like execution for bond-like risk.)

arkis22 6y ago
A dollar of debt is a dollar, but equity can be borrowed against

tripletao 6y ago

This article is incredibly misleading. The Fed is buying ETFs instead of constituent bonds because the ETFs are a more liquid and convenient way to buy the constituent bonds. The net effect is roughly the same as if they bought all the bonds individually, just with less effort and lower transaction costs. (People seem to find it weird that a basket of securities could be more liquid than the securities themselves, and I agree that it's weird; but it seems to be true, and failing to understand that leads to grossly wrong conclusions like those of this article. Matt Levine has many excellent discussions of this effect.) BlackRock is just the administrator, and derives no benefit beyond their management fees. The direct benefit is to the sellers of the constituent bonds (whether individually or as part of the ETF), who get a higher price. There's also indirect benefit to the non-selling owners of the bonds, since that stops the price from dropping to the point they'd get a margin call and be forced to sell. That indirect benefit is the primary goal of this program, to avoid forced, cascading, 2008-style deleveraging. The Fed isn't trying to directly support the issuers (though the issuers do benefit from functioning capital markets, if they do choose to raise more money at this time). The $75B allocated for losses is just an accounting placeholder; they don't know what the losses or gains will be. Historically these kinds of programs have often ended up net profitable, though that's not that point.

whatok 6y ago
This is also a misleading comment. The main purpose of the Secondary Market Corporate Credit Facility is to purchase secondary market bonds and this is stated in the IMA and term sheet. The only reason why they're buying ETFs right now is because it's easier operationally and the issuer registration process for primary and secondary bond purchases has been difficult so far. They are not buying ETFs because they are "more liquid and convenient" vs underlying. The Fed also is absolutely trying to directly support issuers through these facilities and ETF purchases are an important part of this. Primary issuance is dictated by where secondary markets are trading and if some of the most liquid corp instruments (ETFs) are trading extremely wide or at a huge discount to NAV (like they were before these facilities were announced) then primary issuance will either be much more expensive or completely closed.
- 6y ago

whatok 6y ago

The Fed has two corporate facilities in-place right now: the Primary Market Corporate Credit Facility and the Secondary Market Corporate Credit Facility. ETF purchases fall under the SMCCF. Secondary corporate bond purchases are also under the SMCCF but they have not made any purchases yet. There is an issuer registration process that is thought to carry some stigma (Google "discount window stigma" if not familiar with something similar) especially with backlash towards larger companies taking advantage of PPP. There are no issuers currently registered. As far as primary issuance goes, the same issuer registration process is in play. There are pretty punitive funding fees vs where syndicated bond issuance is right now so there's little incentive for issuers to participate in it as well. Primary corporate markets are very wide open and have been ever since they announced these facilities. Investment grade issuance is at over $1trn on the year and have been very concentrated in the last few months. The Fed has bought around $6bn in ETFs so far which is really nothing in the grand scheme of things. The main effect these facilities have had so far is restore market confidence.