4 ms·

> 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 th

by 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.

tripletao 6y ago
Appreciate the deeper context from a practitioner, and no question that they intended to buy individual bonds--as you note, this could have been a much simpler program if they intended only/primarily to buy ETFs. I think the question is whether to consider their failure to buy individual bonds as an ordinary bureaucratic delay, or as the emergent but "correct" result? For example, is it just an inconsistency that issuers need to attest that they didn't receive money under the CARES act if their bonds are purchased directly, but not if they're purchased as part of an ETF? Or does that make sense, since it's politically acceptable to support a diversified index, but not to support a specific company that already received other government help? I like the latter choice because it's satisfying and logical, though I understand that the reality is hazier.
- whatok 6y ago
  I truly believe that it emerged as a bureaucratic screw-up and can see how it evolved to its current state. I think it makes sense that they have a certification process for primary issuance and given CARES act strings attached, I can see how that also got attached to the secondary facility. Requiring issuer certification for secondary purchases was a complete surprise to everyone and the base assumption was that they were going to just follow some sort of index approach. Mentioned before but the ECB does not have any sort of certification process for their corporate program but that corporate program was also not launched at the same time as a huge fiscal program, so politics. I do agree that buying ETFs is "cleaner" for all sorts of reasons. The certification process for bonds vs ETFs is slightly inconsistent but given that they're not going to participate in the create/redeem process, I don't have too much an issue with it. If they were buying ETFs, redeeming them, and then actively managing the bonds from there, then it would be a little more murky. Besides the fallen angel ETFs, none of the ETFs they've bought so far (and everything that qualifies as well) does not have any real issuer concentration that you could argue tremendously favors any particular issuer beyond reflecting the actual bond market. To further expand on the overall topic, if all the Fed did was buy ETFs, there's a real risk that would not be enough. During any crisis, in order to be effective, central banks need to make big moves. To use a crude metaphor, individual bullets fired separately don't have nearly as much impact as a single bazooka round and sometimes you only have a chance for one shot. Bond markets aren't as efficient as equities and without secondary purchases, there could have been a real chance that you had ETFs more or less stabilized but several underlying issuer/sectors/whatever aggregate group continue to be dislocated. For another crude metaphor, sometimes the tail (ETFs) wags the dog on this stuff and vice versa. In order to have functioning markets, you need complete control over the entire animal which would be primary issuance, secondary bonds, and one of the more liquid proxies.

by whatok 6y ago

tripletao 6y ago

Appreciate the deeper context from a practitioner, and no question that they intended to buy individual bonds--as you note, this could have been a much simpler program if they intended only/primarily to buy ETFs. I think the question is whether to consider their failure to buy individual bonds as an ordinary bureaucratic delay, or as the emergent but "correct" result? For example, is it just an inconsistency that issuers need to attest that they didn't receive money under the CARES act if their bonds are purchased directly, but not if they're purchased as part of an ETF? Or does that make sense, since it's politically acceptable to support a diversified index, but not to support a specific company that already received other government help? I like the latter choice because it's satisfying and logical, though I understand that the reality is hazier.

whatok 6y ago
I truly believe that it emerged as a bureaucratic screw-up and can see how it evolved to its current state. I think it makes sense that they have a certification process for primary issuance and given CARES act strings attached, I can see how that also got attached to the secondary facility. Requiring issuer certification for secondary purchases was a complete surprise to everyone and the base assumption was that they were going to just follow some sort of index approach. Mentioned before but the ECB does not have any sort of certification process for their corporate program but that corporate program was also not launched at the same time as a huge fiscal program, so politics. I do agree that buying ETFs is "cleaner" for all sorts of reasons. The certification process for bonds vs ETFs is slightly inconsistent but given that they're not going to participate in the create/redeem process, I don't have too much an issue with it. If they were buying ETFs, redeeming them, and then actively managing the bonds from there, then it would be a little more murky. Besides the fallen angel ETFs, none of the ETFs they've bought so far (and everything that qualifies as well) does not have any real issuer concentration that you could argue tremendously favors any particular issuer beyond reflecting the actual bond market. To further expand on the overall topic, if all the Fed did was buy ETFs, there's a real risk that would not be enough. During any crisis, in order to be effective, central banks need to make big moves. To use a crude metaphor, individual bullets fired separately don't have nearly as much impact as a single bazooka round and sometimes you only have a chance for one shot. Bond markets aren't as efficient as equities and without secondary purchases, there could have been a real chance that you had ETFs more or less stabilized but several underlying issuer/sectors/whatever aggregate group continue to be dislocated. For another crude metaphor, sometimes the tail (ETFs) wags the dog on this stuff and vice versa. In order to have functioning markets, you need complete control over the entire animal which would be primary issuance, secondary bonds, and one of the more liquid proxies.