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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

by 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.

by gvhst 6y ago

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.