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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 issue

by 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.
  - arkis22 6y ago
    Be precise. It seems like you think the Fed's failure is that they don't buy individual bonds. Why would the Fed prefer to buy individual bonds? The Fed buys individual bonds. It buys government debt and people hate them for it.
    - tripletao 6y ago
      I'm not sure what you mean? I think the Fed buying ETFs is fine, and that the Fed buying individual corporate bonds on the secondary market would be fine too but more complicated to administer without the appearance of political favoritism. So it makes sense to me that they're buying ETFs. whatok pointed out that the Fed didn't originally set out to buy mostly (or exclusively) ETFs, but rather to buy mostly individual bonds--it's just that the individual-bonds program turned out to be too complicated to actually use, so they ended up buying all ETFs. I thought that was a good clarification, and an interesting lesson on the complexity of modern finance (that even the creators of the program failed to predict how it would actually work). I'm not sure what to say to someone who hates the Fed for buying government debt, beyond that they've grossly misunderstood how a central bank works. I'd guess they also hate both the individual corporate bonds and the ETFs, so I'm not sure what your point is there?
- whatok 6y ago
  > If no one wants to sell to the Fed, why do they need a certification? I don't understand your first question. The certification process covers both primary and secondary purchases. The Fed's terms for primary purchases are pretty punitive and most issuers that qualify for it would easily be able to raise in syndicated markets. Markets are open right now so this does not present an issue. The problem is the Fed is also unable to make secondary purchases unless issuers go through the certification process. The main purpose of the SMCCF is to buy secondary corporate bonds and they're unable to move on that because of the certification process. Issuers would love to sell to the Fed but your understanding is only a small reason why none have certified yet. A lot has changed since these facilities were announced and there was extreme backlash against larger corporations taking advantage of PPP. There's a similar fear attached to this. > Also they're buying ETFs of bonds, are you saying this is materially different than buying the actual bonds? Yes, there absolutely is a material difference for the purposes of this facility and in actual trading. For the purposes of this facility, there are still many sectors/subsectors trading pretty wide to pre-covid levels. If you believe that these bond purchases facilitate the Fed's mandate of maximum employment, then targeting specific sectors that are having funding pressures would be one of accomplishing that. > If there is something preventing you from making trades it means you have lower liquidity. That's a really bizarre definition of liquidity for the context of this; especially when you're talking about the Fed. The discussion was on ETFs being more liquid than the underlying bonds. Something preventing me from trading does not mean that the thing being traded is illiquid. For example, there are many securities that require an ISDA to trade and offer way more liquidity than other similar options.
  - arkis22 6y ago
    The Fed does not want to do credit analysis. They do not want to be the primary purchasers of debt. As a lender of last resort, they want to buy debt from primary purchasers in the hope that they valued the debt correctly. Of course... Everyone with poor debt quality would LOVE to sell to the Fed... One of the big lessons of ETFs the past year has been whether the underlying "fake" liquidity of ETFs would cause problems for the underlying real poor liquidity of bonds. The Fed is buying ETFs because the price of the ETF goes into the underlying bonds. The Fed is buying bonds. They think it's close enough to buying the bonds. It's really bizarre to me that you think a poor definition of liquidity is that you personally cannot sell bonds. I don't care if the market is bad or your phone is too broken to make your sell order. Complain to your boss that the market was fine but you couldn't make the trade. See what they say. You cannot trade. Your liquidity is bad.

by whatok 6y ago

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.
- arkis22 6y ago
  Be precise. It seems like you think the Fed's failure is that they don't buy individual bonds. Why would the Fed prefer to buy individual bonds? The Fed buys individual bonds. It buys government debt and people hate them for it.
  - tripletao 6y ago
    I'm not sure what you mean? I think the Fed buying ETFs is fine, and that the Fed buying individual corporate bonds on the secondary market would be fine too but more complicated to administer without the appearance of political favoritism. So it makes sense to me that they're buying ETFs. whatok pointed out that the Fed didn't originally set out to buy mostly (or exclusively) ETFs, but rather to buy mostly individual bonds--it's just that the individual-bonds program turned out to be too complicated to actually use, so they ended up buying all ETFs. I thought that was a good clarification, and an interesting lesson on the complexity of modern finance (that even the creators of the program failed to predict how it would actually work). I'm not sure what to say to someone who hates the Fed for buying government debt, beyond that they've grossly misunderstood how a central bank works. I'd guess they also hate both the individual corporate bonds and the ETFs, so I'm not sure what your point is there?
whatok 6y ago
> If no one wants to sell to the Fed, why do they need a certification? I don't understand your first question. The certification process covers both primary and secondary purchases. The Fed's terms for primary purchases are pretty punitive and most issuers that qualify for it would easily be able to raise in syndicated markets. Markets are open right now so this does not present an issue. The problem is the Fed is also unable to make secondary purchases unless issuers go through the certification process. The main purpose of the SMCCF is to buy secondary corporate bonds and they're unable to move on that because of the certification process. Issuers would love to sell to the Fed but your understanding is only a small reason why none have certified yet. A lot has changed since these facilities were announced and there was extreme backlash against larger corporations taking advantage of PPP. There's a similar fear attached to this. > Also they're buying ETFs of bonds, are you saying this is materially different than buying the actual bonds? Yes, there absolutely is a material difference for the purposes of this facility and in actual trading. For the purposes of this facility, there are still many sectors/subsectors trading pretty wide to pre-covid levels. If you believe that these bond purchases facilitate the Fed's mandate of maximum employment, then targeting specific sectors that are having funding pressures would be one of accomplishing that. > If there is something preventing you from making trades it means you have lower liquidity. That's a really bizarre definition of liquidity for the context of this; especially when you're talking about the Fed. The discussion was on ETFs being more liquid than the underlying bonds. Something preventing me from trading does not mean that the thing being traded is illiquid. For example, there are many securities that require an ISDA to trade and offer way more liquidity than other similar options.
- arkis22 6y ago
  The Fed does not want to do credit analysis. They do not want to be the primary purchasers of debt. As a lender of last resort, they want to buy debt from primary purchasers in the hope that they valued the debt correctly. Of course... Everyone with poor debt quality would LOVE to sell to the Fed... One of the big lessons of ETFs the past year has been whether the underlying "fake" liquidity of ETFs would cause problems for the underlying real poor liquidity of bonds. The Fed is buying ETFs because the price of the ETF goes into the underlying bonds. The Fed is buying bonds. They think it's close enough to buying the bonds. It's really bizarre to me that you think a poor definition of liquidity is that you personally cannot sell bonds. I don't care if the market is bad or your phone is too broken to make your sell order. Complain to your boss that the market was fine but you couldn't make the trade. See what they say. You cannot trade. Your liquidity is bad.