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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 i

by 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.

tripletao 6y ago
I'm not sure where we disagree? What's the difference between your "easier operationally" and my "more liquid and convenient"? You agree in your other comment that the ETFs were more liquid than the underlying. And I agree and noted previously that issuers benefit from working (secondary) capital markets.
- whatok 6y ago
  Your post says that they’re not buying bonds because ETFs are a better option. That’s exactly true and ETF purchases are not the main goal of the facility. There is way more capital allocated towards primary and secondary bond purchases than there is for ETFs and they’ve stated that ETFs are last in their purchase waterfall. Operationally, it’s much more difficult to get the bond purchases rolling because they have to get individual issuer certifications before making any purchases. This is a restriction created by Congress and had it not been in place, they would be buying bonds right now. They are likely going to make some modifications to the facility in order to streamline this process because it’s preventing them from achieving the main goal of it: buying bonds.
  - tripletao 6y ago
    First, I think you're missing a "not" in your second sentence? The certifications are an interesting additional detail that I wasn't aware of. So if I understand correctly, the program wrote one set of rules for purchases of individual bonds, and then a different set of rules for purchases of ETFs. It allocated more money for individual bonds, but the Fed discovered that those rules meant that no issuers wanted to participate. So the Fed instead purchased ETFs. I think I'd still say that makes the ETFs more convenient? Certainly that's true under those rules; and to the extent those different rules exist for good reason (e.g., because with a diversified and liquid index, it's easier to avoid both the appearance of political favor and the actual thing), that seems fundamentally true too. So I don't see what that changes in my initial statement, though it's interesting that it happened "by accident" instead of by design.
    - whatok 6y ago
      > First, I think you're missing a "not" in your second sentence? Yes, thank you for pointing out. > The certifications are an interesting additional detail that I wasn't aware of. So if I understand correctly, the program wrote one set of rules for purchases of individual bonds, and then a different set of rules for purchases of ETFs. It allocated more money for individual bonds, but the Fed discovered that those rules meant that no issuers wanted to participate. So the Fed instead purchased ETFs. The rules were not spelled out at the time of the announcement; including the part on personal certification by the issuer. If you look to the ECB corporate program for example, they do not require issuer certification and that was seen as a model for the operations of this. Without getting too deep into things, Congress wanted to make sure that US companies benefited from this and that's part of the certification process. Additionally, certification requires attesting that the issuer has not received money under the CARES act and while it's not been publicly stated, it's suspected that's one of the reasons why personal issuer certification is required. While all of this was evolving, PPP launched and there was a lot of backlash on large corporations receiving money. Between the logistics of having individual issuers certify and issuers being reluctant to certify, the bond purchase portion of the program has been stalled. So yes, the Fed made its first corporate facility purchases through ETFs as a result of all of this but also took two months to do so. If the main goal of the facility was to buy ETFs and they really wanted to get it done, they could get that up and running within a week max if not sooner. > I think I'd still say that makes the ETFs more convenient? Certainly that's true under those rules; and to the extent those different rules exist for good reason (e.g., because with a diversified and liquid index, it's easier to avoid both the appearance of political favor and the actual thing), that seems fundamentally true too. So I don't see what that changes in my initial statement, though it's interesting that it happened "by accident" instead of by design. I take issue with saying that they're making ETF purchases because they're more liquid and convenient for a few reasons. One of the main reasons is that only reason why they're buying them right now is because it's the only thing they're actually able to buy. Liquidity and convenience really mean nothing when you only have a single option. As far as avoiding anything with politics, there was no consideration given for that when the facilities were announced and I doubt there is any now. They changed purchase eligibility retroactively to include fallen angels and the cutoff date magically included Ford while excluded several sizable issuers by a day or two. It's also very tough to hand out favors through bond purchases in a way that would materially affect funding costs for a specific issuer AND have it slip under the radar. While that doesn't escape the appearance of political favors, I would argue that by selecting Blackrock as the investment manager they really don't care about the appearance of politics. In fact, by selecting Blackrock, it shows that their primary goal was bonds rather than ETFs as you can easily find an investment manager to manage a few billion in ETFs; it's much harder to find one that can manage few hundred billion in bonds.
arkis22 6y ago
They're buying shares of ETFs because it's easier operationally but not because its more liquid and convenient? Those seem pretty close to synonymous to me.
- whatok 6y ago
  They’re quite different for the purposes of this facility and really trading in general. As I mentioned a few times here, the Fed is requiring individual issuer certification for bond purchases. They have not had any issuers certify yet so they have not made any bond purchases. Liquidity and convenience in the markets means I can trade in size with tight bid/ask and possibly don’t need to deal with a scumbag dealer on the phone/chat. Operationally to me means there is something that prevents me from trading at all.
  - arkis22 6y ago
    OK. Issuers need a certification to sell to the Fed. My understanding is that no one wants to sell to the Fed because the first person that does will be seen as having a weak financial position. This was the reasoning for TARP - the Feds made every bank take money, even if they didn't need it. If no one wants to sell to the Fed, why do they need a certification? Also they're buying ETFs of bonds, are you saying this is materially different than buying the actual bonds? If there is something preventing you from making trades it means you have lower liquidity.
    - tripletao 6y ago
      I think I understand whatok's distinction, and I think it's significant. They're saying the Fed is buying ETFs instead of individual bonds not because they prefer to buy ETFs, but because the certification rules forbid them from buying bonds. That's a consequence of those rules, and not of the market for the individual bonds, except to the extent the different characteristics of the individual bonds vs. ETFs caused those different rules to be written in the first place (which I do believe is the case, per my other comment). I believe my original comment more or less correctly describes the operation of the program, and the reason for that operation. That operation wasn't actually the intent of the program, though, just the consequence of rules that didn't work like the drafters expected.

by whatok 6y ago

tripletao 6y ago

I'm not sure where we disagree? What's the difference between your "easier operationally" and my "more liquid and convenient"? You agree in your other comment that the ETFs were more liquid than the underlying. And I agree and noted previously that issuers benefit from working (secondary) capital markets.

whatok 6y ago
Your post says that they’re not buying bonds because ETFs are a better option. That’s exactly true and ETF purchases are not the main goal of the facility. There is way more capital allocated towards primary and secondary bond purchases than there is for ETFs and they’ve stated that ETFs are last in their purchase waterfall. Operationally, it’s much more difficult to get the bond purchases rolling because they have to get individual issuer certifications before making any purchases. This is a restriction created by Congress and had it not been in place, they would be buying bonds right now. They are likely going to make some modifications to the facility in order to streamline this process because it’s preventing them from achieving the main goal of it: buying bonds.
- tripletao 6y ago
  First, I think you're missing a "not" in your second sentence? The certifications are an interesting additional detail that I wasn't aware of. So if I understand correctly, the program wrote one set of rules for purchases of individual bonds, and then a different set of rules for purchases of ETFs. It allocated more money for individual bonds, but the Fed discovered that those rules meant that no issuers wanted to participate. So the Fed instead purchased ETFs. I think I'd still say that makes the ETFs more convenient? Certainly that's true under those rules; and to the extent those different rules exist for good reason (e.g., because with a diversified and liquid index, it's easier to avoid both the appearance of political favor and the actual thing), that seems fundamentally true too. So I don't see what that changes in my initial statement, though it's interesting that it happened "by accident" instead of by design.
  - whatok 6y ago
    > First, I think you're missing a "not" in your second sentence? Yes, thank you for pointing out. > The certifications are an interesting additional detail that I wasn't aware of. So if I understand correctly, the program wrote one set of rules for purchases of individual bonds, and then a different set of rules for purchases of ETFs. It allocated more money for individual bonds, but the Fed discovered that those rules meant that no issuers wanted to participate. So the Fed instead purchased ETFs. The rules were not spelled out at the time of the announcement; including the part on personal certification by the issuer. If you look to the ECB corporate program for example, they do not require issuer certification and that was seen as a model for the operations of this. Without getting too deep into things, Congress wanted to make sure that US companies benefited from this and that's part of the certification process. Additionally, certification requires attesting that the issuer has not received money under the CARES act and while it's not been publicly stated, it's suspected that's one of the reasons why personal issuer certification is required. While all of this was evolving, PPP launched and there was a lot of backlash on large corporations receiving money. Between the logistics of having individual issuers certify and issuers being reluctant to certify, the bond purchase portion of the program has been stalled. So yes, the Fed made its first corporate facility purchases through ETFs as a result of all of this but also took two months to do so. If the main goal of the facility was to buy ETFs and they really wanted to get it done, they could get that up and running within a week max if not sooner. > I think I'd still say that makes the ETFs more convenient? Certainly that's true under those rules; and to the extent those different rules exist for good reason (e.g., because with a diversified and liquid index, it's easier to avoid both the appearance of political favor and the actual thing), that seems fundamentally true too. So I don't see what that changes in my initial statement, though it's interesting that it happened "by accident" instead of by design. I take issue with saying that they're making ETF purchases because they're more liquid and convenient for a few reasons. One of the main reasons is that only reason why they're buying them right now is because it's the only thing they're actually able to buy. Liquidity and convenience really mean nothing when you only have a single option. As far as avoiding anything with politics, there was no consideration given for that when the facilities were announced and I doubt there is any now. They changed purchase eligibility retroactively to include fallen angels and the cutoff date magically included Ford while excluded several sizable issuers by a day or two. It's also very tough to hand out favors through bond purchases in a way that would materially affect funding costs for a specific issuer AND have it slip under the radar. While that doesn't escape the appearance of political favors, I would argue that by selecting Blackrock as the investment manager they really don't care about the appearance of politics. In fact, by selecting Blackrock, it shows that their primary goal was bonds rather than ETFs as you can easily find an investment manager to manage a few billion in ETFs; it's much harder to find one that can manage few hundred billion in bonds.

arkis22 6y ago

They're buying shares of ETFs because it's easier operationally but not because its more liquid and convenient? Those seem pretty close to synonymous to me.

whatok 6y ago
They’re quite different for the purposes of this facility and really trading in general. As I mentioned a few times here, the Fed is requiring individual issuer certification for bond purchases. They have not had any issuers certify yet so they have not made any bond purchases. Liquidity and convenience in the markets means I can trade in size with tight bid/ask and possibly don’t need to deal with a scumbag dealer on the phone/chat. Operationally to me means there is something that prevents me from trading at all.
- arkis22 6y ago
  OK. Issuers need a certification to sell to the Fed. My understanding is that no one wants to sell to the Fed because the first person that does will be seen as having a weak financial position. This was the reasoning for TARP - the Feds made every bank take money, even if they didn't need it. If no one wants to sell to the Fed, why do they need a certification? Also they're buying ETFs of bonds, are you saying this is materially different than buying the actual bonds? If there is something preventing you from making trades it means you have lower liquidity.
  - tripletao 6y ago
    I think I understand whatok's distinction, and I think it's significant. They're saying the Fed is buying ETFs instead of individual bonds not because they prefer to buy ETFs, but because the certification rules forbid them from buying bonds. That's a consequence of those rules, and not of the market for the individual bonds, except to the extent the different characteristics of the individual bonds vs. ETFs caused those different rules to be written in the first place (which I do believe is the case, per my other comment). I believe my original comment more or less correctly describes the operation of the program, and the reason for that operation. That operation wasn't actually the intent of the program, though, just the consequence of rules that didn't work like the drafters expected.